At Cook Martin, one of the most common questions we receive is: How do I survive a tax audit?
This is a valid concern -- everyone realizes that an audit could happen to them any year, so it’s worthwhile to have everything in order so it goes smoothly.
This post will show you the keys to surviving a tax audit.
1. Delay your audit when possible.
The IRS has a 3 year deadline to audit your taxes, so it can benefit you to delay the process. Request more time to get your records in order whenever you can.
Since the IRS is often backlogged, they sometimes request you to waive the statute of limitations to allow them more time. You don’t have to agree to this. Talk to your tax advisor and then respond to their request accordingly.
2. Avoid a field exam.
There are 3 types of audits the IRS conducts:
- Office exams
- Field exams
The most common kind is a correspondence audit, which taxpayers receive through the mail. For an office exam, you will need to go into an IRS office to answer questions for a few hours to clear up any issues.
A field exam is the most comprehensive audit, that takes place at your place of business. This is usually the most frightening for taxpayers, and consists of intense questioning and verification of financial information by a revenue agent.
If you can, avoid a field exam, and consult a tax professional if the IRS wants you to host the audit.
3. Don’t offer up extra information.
If you want your audit to go smoothly and quickly, the best thing to do is stay focus on the initial issue that caused the audit in the first place.
That means you don’t offer up any extra information to your auditors that they didn’t specifically ask for. If you volunteer new information, it could cause them to start asking more questions and dig further into your records. That’s another reason why it’s helpful to work with an intermediary.
4. Work with your auditor.
It’s important to remember that most audits are cases of simple mistakes that can be resolved. It’s easy to make a math error, and sometimes the IRS just wants some supporting documents for something they saw in your filing.
Just because you’re being audited doesn’t mean you automatically have to pay. If you have missing receipts or other documents, you’re allowed to reconstruct your records to try and rectify the issue.
You can also negotiate with the auditor about the disallowances she’s considering.
5. Consult an IRS Audit expert.
If you hire a tax attorney or CPA, you can avoid dealing with the IRS directly during your audit. And it’s important to remember that just because you’re being audited doesn’t mean you’re necessarily in the wrong.
Some deductions, for example, are considered controversial -- leading the IRS to take an aggressive stance against them. But tax lawyers and accountants are well read on the shades of grey in tax policy, and can help you immensely if you end up in court over the matter.
6. Have realistic expectations.
The chances of being are actually pretty slim -- for most businesses, it’s less than 1%.
Still, it’s important for everyone to know what to expect in case it does happen.
The big question on most people’s minds is: If I can’t provide the requested records, what happens next?
Unless your case is an example of tax evasion or extreme willful negligence, you’ll probably not receive any jail time. But the audit can still cost a lot of money. If they aren’t satisfied with your tax return, then a common action is to remove your erroneous deductions or include income you omitted. You’ll have to pay the tax, as well as interest.
7. Appeal the result.
When you get a report of your audit, call the IRS about anything you don’t understand or disagree with. You might be able to make a compromise.
If you’re dissatisfied with the audit result, definitely hire a tax attorney or CPA. Professionals help many argue and win in court, because the IRS isn’t interested in seeing taxpayers win appeal levies down the road.
Receiving notification from the IRS that you are being audited can be intimidating. Knowing what to expect and preparation for the audit, along with the other points above, are key considerations to surviving the audit. Always talk to a tax attorney or your CPA if you have any questions or need assistance.