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Money Management
Strategies to Follow When the IRS Says, "Prove It"
Everyone dreads the thought of getting that letter from the Internal Revenue Service
(IRS). You know - the one that says the IRS would like to audit your tax return.
Yes, fear of being audited by the IRS can make even the most stalwart taxpayer panic. But, according to the New
Jersey Society of Certified Public Accountants (NJSCPA), an audit should be viewed as nothing more than an impartial
verification that you have reported all your income and are entitled to the exemptions, deductions, and tax credits
claimed. Should that dreaded notification appear in your mailbox, here are some helpful strategies for dealing
with the IRS.
Strategy #1 - Don't panic. Prepare!
Carefully read the letter from the IRS to verify that the information is correct. Be sure you understand what you
are being asked to do. Respond promptly but don't hesitate to ask for a postponement if you need more time to assemble
your records. Preparation is the key to getting through the audit as painlessly as possible. Be sure to review
each entry on your return, organize your records, and identify potential problem areas.
Strategy #2 - Think twice before attending your own audit.
You can choose to handle the audit by yourself, have a representative, such as your CPA, go with you, or have him
or her go in your place. Most experts recommend that you do not attend your audit. Having representation is often
the best way to prevent the audit from escalating beyond the original area(s) that attracted the IRS's attention.
For example, if the auditor decides to question an area on your tax return, a representative can say that he/she
doesn't have the answer, thereby giving you more time to research the area and secure the necessary documentation.
If you decide to attend the audit and address the questions yourself, it is important that you provide exactly
the information needed to answer a legitimate request by an auditor and no more. Answer questions honestly but
briefly, and hand over only the documents needed to support the deduction being questioned. Providing the minimum
amount of information helps to contain the audit. CPAs recommend that you don't become argumentative. What you
don't know about tax law can hurt you. It generally works to your benefit to let the auditor lead the discussion.
Strategy #3 - Know your rights.
The IRS is required to inform you about your rights as a taxpayer. For example, you have the right to prompt, courteous
and impartial treatment. You have the right to ask for a reasonable amount of time to produce requested documentation,
stop the audit to consult a tax advisor, and request that the site of the audit be changed. For complete details,
read IRS Publication 1, Your Rights as a Taxpayer. You can order this publication by calling the IRS at 1-800-829-3676.
Strategy #4 - Know the appeals procedure.
In the end, you may agree or disagree with the auditor's findings. By agreeing, you will be asked to sign a form
to that effect and pay any outstanding taxes, interest, and penalties. If you disagree, you can speak with the
agent's group manager to see if the problem can be resolved at that level. If that is not successful, there are
numerous avenues of appeal you can pursue, such as taking the case to Tax Court. It's wise to consult with a CPA
who can recommend the best approach for your particular situation.
Strategy #5 - Avoid getting audited.
Perhaps, the best strategy is to avoid being audited in the first place. Some of the "red flags" that
may increase your chances of an audit include any evidence of unreported income, personal expenses disguised as
business deductions, large deductions that are out of line with reported income, and sideline businesses that never
show a profit. If your return includes a large or unusual deduction or credit you think the IRS may question, you
may want to attach an explanation to your return.
Most importantly, CPAs recommend that you maintain accurate and comprehensive records to support your deductions.
For this reason it's important to put recordkeeping at the top of your to-do list.
Published: April 16, 2001
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Money Management is a weekly column on personal
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