By Chloe DiVita
If there is one word that everyone fears hearing, it’s "audit." It seems to instill a certain type of fear in most people, and for those who routinely try to manipulate the system, it probably should. But, if you are of the mind set where you’d rather report correctly, and know you can support all your information should the time come, the word audit shouldn’t scare you at all.
So often you hear rumors about *how* the IRS picks the returns to be audited. Some may be accurate, but some are simply ridiculous. If you are curious as to the true methods the IRS uses to choose its audit candidates, click here. While there are probably other circumstances that lead to a tax return being audited, this covers the majority of situations. And, the probability of being chosen from some other method is so minuscule, it’s not worth fretting over.
The first thing to know if you are chosen by the IRS to be audited is that you can request the IRS turn over all information they have, and will be looking into, prior to the actual sit down. You can do this by filing a 4506-T, which is a Request for Tax Return Transcript. This should provide you with the detail behind the items being questioned in your tax return. And, if somehow you have misplaced your tax return, you file a 4506 to get a copy of it. There is a fee, but it’s worth it to be prepared. It’s much easier to prove yourself when you know the whys behind what they are going to be looking at.
Second, don’t panic. When that little white envelope arrives from the IRS read it carefully. Sometimes they are only seeking a forgotten signature. Not all audits involve a complete probe of your records. If panicking seems to come easily to you, seek professional assistance. And by that we mean a CPA. We all know IRS language can be hard to decipher, so seek a translator before jumping to conclusions.
Third, be familiar with the different types of audits, and which one you fall into. Among the three levels of audits the correspondence audit is the least intrusive. Correspondence audits are for minor mistakes. Simply send back to the IRS whatever they are asking for, and once they are satisfied with the paperwork, the matter will be closed. If you have been chosen for a field audit, be prepared to have an auditor come to your home, or place of business, to verify your return. This is usually done if the return is very complex, and involves business operations. Be organized and prepared. An auditor will take into account the state of your records, and your surroundings. It never hurts to show an auditor what an organized person you are! Last, but not least, and definitely the most dreaded, we come to the office audit. No one likes this type of audit because now the IRS has pulled you into their territory. You will be required to appear at an IRS office at a specific date and time, and if you need to reschedule, do so as soon as possible. If you have ordered a transcript of your tax return be sure and make the appointment far enough out to receive the information back prior to your appearance. When you show up, bring only the items in question. The point is to support the information that is being reviewed, not to open up more records for examination.
Finally, and most importantly, know your rights as a taxpayer. The very first publication offered by the IRS, Publication 1, details your rights. At least skim it over before you go face to face with them. Yes, you can bring in a professional, even if they didn't actually file your return. But, be sure to get the proper authorization paperwork. If you don't like the outcome, you can appeal, but know the process. Be aware of the collection process if they find you owe them money and you have no grounds for disagreeing. Also, know what happens if the IRS find they owe YOU money - and yes, that has happened!
People tend to fear the unknown. So educate yourself. Be prepared. Go in feeling confident, and show that confidence whether it's merited or not. There is definitely something to be said for your presence in any situation, and sitting face to face with an auditor is a good time to show confidence. Of course, if you are fully aware you've tried to put one over on the system and you're about to be caught, it may be easier to just run - although, that is definitely NOT our recommendation!
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