The percentage of tax returns being audited each year has steadily declined, due in part to dwindling government resources. Still, if you’ve been notified of a pending audit, those percentages don’t mean much. The only thing that matters is the situation that you’re now in. There are two kinds of audits; in person and by mail. It’s disconcerting to receive an audit notification, no matter what kind. If you find yourself in this situation, here’s how to handle it.
Notify Your Accountant
The first phone call you should make is to your tax accountant. Your accountant will be an invaluable resource as the audit progresses, so you need to give them the pertinent date(s) of the audit to ensure the accountant’s availability. In addition, numerous financial documents will need to be provided to the auditor, and your accountant will have many of these records. They’ll need some time to get everything together and organized. The sooner you notify your accountant, the better prepared they—and you—can be.
Don’t Postpone Unless It’s Legitimate
You’re permitted to postpone or reschedule the date of your audit for certain reasons. Legitimate reasons to postpone an audit include:
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you need more time to acquire legal representation
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current date is unavailable for your accountant
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you have other unbreakable commitments during that time
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you need more time to gather records
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there’s a medical condition that needs to be resolved first
Don’t ask for a postponement unless you have a legitimate reason for doing so. You should strive to appear as compliant as possible. Auditors can sense when a person is trying to postpone just to be difficult. It won’t help your case to get on the auditor’s bad side before you’ve even met. Also, be sure you aren’t postponing simply out of fear. You’ll only be delaying the inevitable. If you can meet the date, do so.
Know That You Can Request a Change of Venue
If you’ve moved out of state since the year of filing, your audit venue could be inconvenient for you to get to. You aren’t required to go out of your way to make an appearance miles from your business or residence.
Contact the auditor or office to make a polite change of venue request that’s nearer to your location. Do this as soon as possible after you receive your audit notification. Be prepared to explain why you are asking for the change in venue as well as provide proof of your new residency, if requested.
Understand Your Rights
Whether you’re being audited as an individual taxpayer or your company is being audited, you have certain rights. You should memorize these rights to ensure that you’re being treated fairly. According to the IRS you have a right to:
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professional and courteous treatment by IRS employees
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privacy and confidentiality about tax matters
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know why the IRS is asking for information, how the IRS will use it and what will happen if the requested information is not provided
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representation by oneself or an authorized representative
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appeal disagreements, both within the IRS and before the courts
Carefully Review the Notification
The stress of receiving an audit notification can make it difficult to understand what’s involved. If you’ve never seen one before, it can also be confusing to read the document and find out what tax year is involved, who your auditor will be and how to contact them. The information will all be there, however.
Audit notifications are often accompanied by a detailed list describing all the records that will be reviewed in the course of the audit. Thoroughly review the notification and any attachments so that you completely understand what’s being requested. After you’ve contacted your tax accountant and sent them a copy of the notification, take a day to digest the news. Then go back and read and review the notification until you’re certain you have a firm grasp on what’s happening.
Don’t Hide or Hold Back
If you feel like you might be in big trouble with the audit, you might be tempted to hide certain things or hold back requested information. You might be tempted to do this even if you have no idea whether you’re “guilty” of something. This would be a mistake of great magnitude. There are, of course, penalties for deliberately filing false returns. However, there are even greater penalties for deceiving an auditor, impeding the process of an audit or engaging in other deceptive practices during an audit.
Make a commitment to provide anything and everything that the auditor requests. Even if you’re unsure of why they’re asking for certain things, go ahead and provide it. Again, you want to be as agreeable as you can with your auditor. The more aboveboard you are, the smoother the audit can progress and the faster it will be over with.
Keep Detailed Records
Your auditor will do everything in their power to conduct an organized audit with a paper trail of what was submitted and when. However, don’t rely on that. Immediately start a file for the audit so you can keep track of everything from day one. Keep your own detailed records of every step of the record, including phone calls and emails. Only submit copies of paperwork unless originals are specifically requested. In that case, keep a copy of the original in case it’s not returned for some reason. In the event that you end up disputing the audit findings, this record of the process will prove helpful.
Finally, don’t let an audit notification derail your life. Try to deal with the audit as objectively as possible. It’s certainly stressful to receive such a notice, but keep in mind that an audit is not a personal attack on you or your business. With very rare exceptions, the IRS doesn’t single out people or organizations for audits. Whatever the audit findings turn out to be, you’ll get through it. Your tax accountant can help you to deal with any financial repercussions from the audit, including implementing a payment plan for any back taxes due. For more information and help with dealing with an audit notification, contact your tax professional.