Tips on dealing with an audit

How to beat an audit
Aside from completing your taxes, girl scout cookie sales ending, and getting tricked on April fools day, another thing that people really look forward to this time of year is an IRS audit! WooHoo!

Now that tax time is coming to a close most of us can breathe a sigh of relief. Hopefully you got some money back so it feels like a bonus paycheck that you can hopefully splurge on yourself a little. But for a few select people out there, they may be lucky enough to get audited. And since tax season is also the season of "giving", I decided that while the IRS might be "giving" you an audit, I will give you some tips on how to deal with an audit.

Why take advice from me?

I happen to work in an industry that gets regularly audited so I see the process a few times a year, and although it's not a finance related audit I have been given some tips on how to handle the situation. Since the primary concern of an audit is to verify overall compliance, these tips should translate to an IRS audit too.

Correspondence Audit

Probably the most common audit would be the correspondence audit, this type of audit would be done entirely through the mail and it's mostly for correcting missing forms or proof of deductions such as receipts for business expenses. The main key to handling this type of audit would be to first, carefully read your letter. Make sure that when you respond to the IRS you provide everything that they have asked for and respond on time. If you forget about the letter, or just completely ignore it, then you are setting yourself up for bigger problems down the road.

Field Audit

A field audit is when someone will come to your home or place of business to verify information that you have submitted. For example, if you wrote off an 80" flat screen TV for your business, they might want to verify how it is used for your business.

Office Audit

An office audit is where you into the examiners office where they will ask you (or your tax representative) to bring in documents that they need to verify. This could be pay stubs or receipts of business purchases.

What is an Auditor?

Since you know you will be meeting with an auditor it's good to know what exactly they do. An auditor is a trained investigator who is skilled at formulating pictures from a limited number of pieces. Sometimes auditors can be intentionally obtuse, don't be offended by this, many are purposefully trained to be. It is a way for you to reveal more than if they just directly asked you what they were looking for.

Do's and Do Not's

  • Always have your documentation prepared. The proper documentation will usually give them all of the answers they are looking for.
  • When you are asked questions reply with simple, honest and complete answers.
  • Listen carefully and ask for clarification if you are unsure of what is being asked.
  • Be calm, it's not a witch hunt, no one is trying to burn you at the stake.
  • Don't talk too much and be specific about your answers. Audits have a scope the more that you talk about items outside of this scope, the more it widens the scope of the original audit. They will probe these new areas you open to them.
  • Don't get angry or irritated at the auditor, they are just doing their job. If you give them a hard time, they may try to give you a hard time. I'm guessing they can make your day worse than you can make theirs. Clarify misunderstandings with positive rather than negative statements.
If you have a tax preparer then it's probably best to let them represent you in an audit. They have more experience and should know exactly what the auditor is looking for and be able to resolve any issues that arise.

Hopefully you never have to go through an audit, but if you do, remember that it doesn't have to be a bad experience. It can even be a positive learning experience going through an audit. If you clear up any issues from an audit it can even leave you with a good story about how you "beat" the government at their own game!

Have you ever been audited? Do you have any other helpful tips for everyone else out there?

4 comments:

  1. If we ever get audited, I think I'll just jump off a bridge. On my agenda today is to review our professionally generated tax returns--about 2.5 inches worth. We are U.S. citizens living in Canada with assets and work in both countries--you wouldn't believe the tax implications.

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    1. I tried to make it sound like audit's weren't a terrible experience! (I guess I failed at that though) I don't envy your position, that sounds like a complicated tax situation. On the bright side, if your taxes were professionally generated and you are just reviewing them, if you do get audited then your tax professional should be the one representing you in the case of an audit.

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  2. These are pretty solid tips. I think one of the keys is to not panic. They aren't going to throw you in jail! Most likely, if they do find something wrong, you'll owe any missed taxes and perhaps some interest and/or fees. As long as you've filed your taxes as honestly and thorough as possible, you should be just fine in the end.

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    1. Thanks for stopping by Mr. Utopia.

      That's exactly right, don't panic and carry a towel. (oh wait, I think the towel is only for hitchhiking through the galaxy)

      If something is wrong they are just trying to correct it and you'll have to pay the difference. Once it's done you shouldn't have to worry about it again. If you're lucky the error could be in your favor, who knows!

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