The IRS Audit Process and Procedures: A Survival Guide
Nothing brings greater fear than a letter from the IRS. Refund checks are sent in a window envelope; all other tax matters, like audits, are sent in a plain white wrapper. When the letter comes, you need to arm yourself with an understanding of the IRS audit process and procedures.
Armed with knowledge, you can win an audit, even if you made a mistake. The key is understanding how the IRS works from the inside. Auditors are trained to ask questions that reveal unreported income and overstated expenses. How you answer the auditor’s questions can determine the tone of the audit. The IRS audit process is exposed here. Use this information to protect yourself from the IRS.
The Audit Starts
The IRS letter will either have a date to meet the auditor or a phone number to call the auditor and set an appointment. The later is most common. If you have a business the auditor will need to view your business area or store at least once. Even if you have an accountant or tax attorney, the auditor has the right to speak with you initially. The auditor will exercise that right.
You need to prepare your paperwork prior to visiting the auditor. It is common for an audit to take place two years after the return is filed and you will need to become familiar with your documents from the year in question. It is also common for the tax year on either side of the audited return to face review.
Gather all your documents and add them up. Compare them to the tax return filed. Review your bank statements; compare deposits against reported income. Prepare an explanation if your deposits are greater than reported income. Loan proceeds and transfer of funds from one account to another are common explanations. Have supporting documents available.
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Dos and Don’ts
An IRS audit is not an accusation. Answer questions honestly. Don’t volunteer any additional information. If you have unreported income, missing receipts, or fraud connected with your tax return, you need professional representation.
- Don’t try to bribe the auditor. Yes, people try it. It does not work. It can also get you in very hot water.
- Don’t drag out the audit unnecessarily.
- Do not rush an audit. Take the time needed to document your numbers. If you need more time, ask for it. If denied, go over the auditor's head to her supervisor.
- Do expect the audit process to take months. The initial review leads to weeks of waiting for results. This is common. An audit can take a few months to over a year. A long audit is nothing to worry about.
- Hire professional help. You should not represent yourself in an audit, even if you are a tax pro. If you are a tax pro, don’t represent returns you prepared. Work with another accountant to represent the other’s audits. The IRS likes to use preparer penalties as a wedge between client and preparer. As preparer, you may have done nothing wrong, but the IRS may threaten you to get at your client.
- Be respectful. Auditors are working a 9 to 5 job, like you. Make their life easier and it may make your life easier.
- Don’t agree with everything the IRS auditor says. If she is wrong, be firm and say so.
How did your IRS audit turn out?
After the Audit
When ink has dried on the determination letter, you have several choices, depending on the outcome.
- No adjustment. You deserve a high-five. Your numbers proved out. The IRS has a habit of NOT auditing returns that don’t generate revenue. Your future audit risks just declined.
- Refund. Shame on you. Your audit risk declined because you have the nasty habit of overpaying your taxes. Either take greater care to prepare an accurate return or hire a professional.
- Tax assessment. The IRS says you owe them money. Know that the auditor is wrong as often as right. File an appeal. Consider tax court if appropriate. You also need to take greater care to preserve documents (if the tax due comes from lost receipts) or spend more time filing an accurate return. Consider a tax pro. Tax professionals pay for themselves many times over. By saving a few bucks in preparation fees, you may be over paying your taxes by double that amount.
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The IRS audit process and procedures is not a deep dark secret. IRS rules are very strict, applying to you and them. Congress gave us a taxpayer Bill of Rights. The IRS sends a copy of your rights with each letter. Read and exercise them.