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Surviving An IRS Audit

Updated on December 17, 2011

Are You Doomed?

According to tax expert Sandy Botkin you do not need to fear an IRS audit. According to Botkin, the IRS releases horror stories regarding audits in order to instill fear to get the average tax payer to report their taxes properly.

If you look at audit statistics you will find that average household with less than $200,000.00 in gross income only has a 2% chance of an audit according to 2006 statistics. From these statistics it is easy to see that the majority of tax revenues the IRS receives is not from audits, but from what is reported accurately in a persons normal return. It is in the best interest of the IRS to have fear in the mass population since the majority of people won't be audited.

Understanding this, let me say unequivocally that you should prepare your taxes honestly. DON'T CHEAT! The best tax strategy is to educate yourself regarding the tax laws that would affect your return and take all legitimate deductions that you are allowed. In this HUB you will find out how to prevent a tax audit and what to do should you get the dreaded invitation to bring your return in for a review.

Call IRS at Your Own Risk

Many people, especially those who self prepare, will call the IRS's customer service line to ask questions regarding areas that are unclear to them.  You need to understand a couple of things when you call the IRS to get clarification.

First of all, the IRS does NOT stand behind its answers.  If the customer service representative gives you the wrong answer and you use the information given to you you're stuck.  The burden of filing correctly is yours.

In order to protect yourself you have to have the following information:

  1. Agents name
  2. Agents badge number
  3. Time of Call
  4. The question asked (documented)
  5. The answer given to you (written down)

Preventing An Audit

The best way to prevent (or be prepared for) an audit is to prepare when you are doing your taxes.  Have all your documents in order once you complete your filing.  Support every deduction with documentation and keep it with your copy of the return.  If you are ever audited you won't have to dig through endless amounts of paper.  Everything you need will already be put together.

Ten Keys to Avoiding an Audit

Again, this list is given by tax authority Sandy Botkin:

  • If mailing your return do so by certified mail so that you have a receipt that the return was accepted.  For those who are electronically filing keep the acknowledgment that your return was accepted
  • Send changes of address to the IRS.  For 8822 is the form needed to change your legal address. 
  • Make sure your return is neat.  While most use programs now to file taxes there are still some who complete returns the old fashion way -- by hand.  Make sure that your return is legible.
  • File all elections.
  • Report ALL income.  No matter how small show the income.  When you receive a W2, 1099, or other tax document a copy of that document has been sent to the IRS and will be matched against your return.  Make sure you have every source of income shown.
  • Have your return prepared by a competent tax preparer.  The signature of a tax profession goes a long ways.  While you can file with Turbo Tax or some other tax program and save some money it could cost you in the long run.
  • Break income and expenses into small segments.  According to Botkin, "Income reported to the IRS on a 1099 should bbe separated from other income.  The separation will help IRS determine that you have indeed reported all income earned. Also, break down expenses as far as possible to explain to the IRS examiners exactly what was involved in the expenses."
  • Keep records of expert advise.  Documentation is the key.  If you are relying upon information given to you by a tax professional or IRS employee keep a record of it.
  • Sign your return.
  • Make sure you have entered your social security number correctly.

Preparing for the Audit

  1. Don't panic.  Just because you are being audited does not mean that you are going to owe massive amounts of money.  If you prepare correctly it should be no more than an interview process.  An audit notice is typically just a request by the IRS to find out if your tax return was properly prepared and to determine the proper amount of tax.
  2. Limit the scope of the audit.  In your notice you will be told what the scope of the audit is going to be.  Only bring the documents requested that pertain to the scope of the audit.  If an issue is not raised on audit, it is not often allowed as a question at the appeals level.
  3. You Have the Burden of Proof.  The tax code is written in a way that requires you to prove that your deductions are valid and that you have paid the proper amount of tax.  Therefore, make sure you have proper documentation of all deductions.
  4. Be on time.  The auditor will typically pull your file and start reviewing what they will be doing prior to your arrival.  Being late gives them more time to review your information.  In addition you may irritate your auditor, which is not a good thing.
  5. Bring organized information.  Make sure you have the proper documentation in an order that you can find it.  Be prepared to answer the information which will help the examiner complete the audit more efficiently.
  6. Don't volunteer information.  Don't elaborate on answers, be concise and if a question doesn't appear to be relevant ask why it is being asked.  Answer all questions truthfully, but ramble on with unimportant information.
  7. Ask for tax law references.  If you think that you are right ask the agent for legal references.  Don't accept vague statements or interpretations of the law.
  8. Don't give in.  The IRS Audit Manuel states, "Hasty agreement to adjustments and undue concern about immediate closing of the case may indicate a more thorough examination is needed."  Be persistent especially in areas you believe that you are correct.
  9. Don't tamper with evidence.  More people get indicted for tampering then the original offense itself.  

Closing Thoughts

Taxes are a part of our life and the tax code is complicated.  Many people are solely focused on their current year tax bill or refund, but to not have any problems file your taxes correctly, have documentation, and don't worry about it.

Even the Bible says to render to Cesar that which is Cesar's.  The better your documentation the better you will fare in your total tax liability and in an audit.  You are best served in the long run to have a competent professional prepare your taxes so spring for the couple of hundred dollars and sleep well at night.


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    • Taxcut Editor profile image

      Taxcut Editor 7 years ago from Denver, Colorado

      Very good, I agree with almost everything, except that a competent professional preparing your taxes is only looking out for his own interest, not yours. Learn what you need to to empower yourself to save thousands on your tax bill, that's what I always say.