The IRS may be auditing fewer tax returns these days, but that doesn’t mean you’re home free. In fact, the trend is likely to reverse, now that the currently low audit rates have the Treasury Department’s attention.
Generally, the IRS has three years to audit tax returns. If it finds a significant understatement of income, it could look back at more years’ returns, but not more than the past six. Returns filed in the past two to three years get the most attention.
What should you do if the IRS contacts your for an audit? It’s natural to feel panic, but don’t. Here are a few things to keep in mind before you respond to the IRS.
The first thing you should know is if your return is selected for an audit, the IRS will notify you by mail on official letterhead. The agency will never call you to initiate an audit or to make a demand to collect taxes. Indeed, it continues to warn the public that calls, texts or emails from individuals claiming to work for the IRS demanding money for unpaid taxes are scams. You should simply hang up or ignore such requests.
The IRS letter will tell you which return(s) it intends to audit and whether it will do so by mail or through an in-person interview. An interview may be conducted at an IRS office or at a field audit, in which the IRS meets you at your home, place of business or your tax preparer’s office.
The IRS letter will request information it wants to examine, such as bank deposits or proof of expenses and deductions. It will also provide instructions on how to contact the agency and a date by which your reply is required.
You can proceed with an audit in three ways: attend it personally and speak to the IRS yourself, hire a tax pro to go with you or hire a tax pro to go in your place. My suggestion is that you don’t attend an audit -- have your preparer attend or hire a pro to represent you. If you handle the audit yourself or to attend with your representative, you increase the risk that the IRS agent will ask you questions that put you on the spot.
If you do attend the audit, keep in mind that idle conversation with the auditor helps them but could hurt you. The purpose of each question is to get information that can help determine if you’ve underreported your income or overstated your deductions. Remember, IRS auditors are experienced professionals -- you won’t outwit them.
Regardless of how you choose to handle the audit, here are some basic rules:
- Before the audit, get organized. Gather all the records you used to prepare the tax return(s) being audited.
- Provide only the documents needed to support the point under discussion. Never give the auditor more information than requested.
- Only answer the questions asked. Provide succinct answers, and always respond honestly and briefly. If you’re unsure of how to answer a question, make a note of it and offer to get back to the agent with answers.
- Never give the auditor original documents, only copies. Make a list of everything you submit.
- Remember the reason why you’re there: It’s not to make new friends. Don’t chit-chat or exchange casual conversation. Each comment you make gives the auditor more information about you. But also keep cool and stay calm. Never be argumentative, stubborn or belligerent.
If you hire a tax pro to represent you, wait until your rep has time to review any document before you sign it. Always insist on getting copies of information in the auditor’s files or copies of anything that you sign.
If the audit determines you owe additional taxes, the IRS Collection Process will begin. First, the agency will send you a bill, which will include the taxes owed, plus interest and penalties. If you don’t pay, you’ll get at least one more bill. If you still don’t pay, the IRS will begin collection proceedings.
Collection of unpaid taxes can include the IRS applying any tax refunds to your unpaid tax bill, garnishing your wages or seizing your property and assets.
You should always pay the tax owed in full as quickly as possible. If you need time to complete your payment, you can apply for an installment agreement, which can be set up with the IRS online, by phone or by mail.