If you are unfortunate enough to be subject to an IRS audit (that is about 1 out of every 143 taxpayers in 2018), there are 5 rules you must follow to get the best results from your IRS audit:

1. Prepare for your audit by knowing what the IRS knows – this means you should request what is in your IRS file to see if you and the IRS have discrepancies. Because most IRS audits are related to small businesses or specific IRS issue areas, you should also read and understand how the IRS will audit your type of business and/or your issues- these are called the IRS Audit Technique Guides. They are published at www.irs.gov. One issue that the IRS has recently expressed a great deal of interest in auditing is “cash intensive businesses.” The Audit Technique Guide for these businesses is very informative on what to expect in this type of audit.

You should also get your wage and income transcripts.  The last ten years of your W-2s and 1099s are available to you by contacting the IRS.  The IRS will ask questions about items that are not reported and may even ask about prior year income items.  Be prepared with answers.

2. Know who in the IRS is auditing you- this matters! Correspondence and office audits are very limited in scope- usually looking at one to three issues on your tax return at most. Correspondence (mail) audits are transactional in nature.  Mail audits require that you respond to the IRS on time and provide all the information required.  FOr the IRS, it is a “check-the-box” type audit aimed at quickly verifying items reported on your return.  Office audits are done quickly and at an IRS office.  The IRS does not dive deep into many issues outside of the 3-4 issues they identify on the audit notice.  However, field audits are more extensive and are aimed at finding unreported income. Field audits are rare, so if you have a “Revenue Agent” at your door, you may want to consider getting experienced, professional help. Most correspondence and office audits can be handled yourself without expensive professional representation.

3. Do a mock audit of yourself– review your return and reconcile each line item with your documents. If you do not have documents, try and reconstruct them. Know however that certain deductions need contemporaneous documentation (an example is charitable contributions in which you must have your documentation at the time your file- reconstruction is not permitted). At the least, if you do not have documentation or cannot reconstruct your receipts, provide detailed workpapers and explanations of what was the entry on the return. The IRS is allowed to take “oral testimony” to substantiate deductions. Even if they do not allow the deduction on your return, they may waive any accuracy penalty if you can show your diligence in preparing your return.

4. Ask for everything in writing and respond with everything in writing– this will eliminate confusion and make the audit progress quickly and methodically. It will also alert you to the issues that the IRS is questioning. The IRS requests information and states what they are auditing on a specific form called an “Information Document Request” or “Form 4564.” Insist that all requests for information be in writing and on this form. The response to the IRS should also be in writing, clearly answering the questions posed and providing explanations of any documents attached. Keep a copy of all correspondence as it will be your “evidence” should any dispute arise.

5. Ask the IRS for a second opinion– your auditor’s decision is not final. Don’t fret if you owe at the end – most people owe at the end of IRS audits (about 9 out of 10 according to the IRS). However, what most people do not understand is that the decision of the auditor is not final if you request an “appeal” in a timely manner. When the IRS gives you its final decision, called a “30-day letter,” you have exactly 30 days to request someone else to review the auditor’s decision. The reviewer, called an IRS Appeals Officer, can reconsider your facts and may offer you an “Appeals Settlement.” The “AO” can offer this alternative because they can consider the “hazards” and nuisances of the IRS having to litigate your case. So, if you have an argument that the auditor would not consider, including your oral testimony, getting a second opinion may help greatly.

A final piece of advice

After your audit is over make sure you keep your records of the audit for at least 6 years. Keep these records longer if you have to pay any additional taxes owed in an IRS installment agreement or other alternative payment arrangement. You never know if an IRS interpretation of a rule will be overturned and you can request the IRS to reconsider your audit.

One final piece of advice with an IRS audit: ignoring an audit is not a good idea. It ultimately leads to more taxes owed and more years being audited.

Follow these 5 rules in an audit and you will get the best results.

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