Did you know that less than 1 percent of individual tax returns are audited, and even fewer are expected to be audited in future years?
The odds of being audited are slim, but there’s a chance you could be audited one day. And it’s best to be prepared. We’ve put together helpful information to explain the IRS audit process so that you feel prepared. Here is how to survive an IRS tax audit.
Once you receive the audit notice in the mail, you likely have 30 days to respond. Don’t wait! The IRS can take action without your consent, like automatically adjusting your taxable liability or adding on fees and penalties. Respond as quickly as possible. In most cases, the IRS simply wants to verify a deduction or ask for clarification. A discrepancy is usually easy and simple to resolve.
Be Honest and Remain Calm
If you want the IRS agent to be on your side, remember to keep calm and don’t raise your voice. Getting upset will only increase the stress of the situation and add to the amount of time it will take to resolve. Make the auditor’s job as easy as possible and you could score some bonus points.
It’s okay to disagree but try not to be disagreeable. Stand up for yourself but remain calm throughout the process. At the very least, your whole-hearted cooperation will make everything go more quickly.
Consult an Attorney or Accountant
In the event you need help getting organized, or simply want an expert to back up your claims, consult with a tax attorney or CPA. Having a third person in the mix, who’s not partial to either side, means you’ll have an unprejudiced opinion to help the situation. They may be able to share some expert tips on dealing with an audit, as well as ways to quickly resolve any conflicts with the IRS.
In addition to hiring a professional, take time to familiarize yourself with your books and reports. Just because you hire someone else to manage the bookkeeping doesn’t mean you won’t have to answer for all the goings-on. Get yourself and your tax professional up to speed so you can answer all the questions that come your way.
Don’t Slow the Process
There are two main processes for being audited. One is done via mail correspondence only, while the other requires an in-person meeting either in a field office, local IRS office building, or your place of business. Each one requires a different type of strategy and preparation, so understand the process before jumping in.
Don’t volunteer information that’s not requested as doing so will only slow things down. Be honest and thorough in your replies but don’t overshare. Simply follow the instructions and provide honest answers to their questions.
Bring Copies of Important Documents
Keep track of your original tax documents at all times during the audit meeting. Hand over copies of receipts and other tax information to the IRS agent, but keep the originals with your own tax files. Or request that the auditor make copies of your originals to ensure they get everything they need.
If you hand over the original tax documents, there’s a good chance they could get misplaced and the IRS will not be held responsible for any lost tax papers.
Be Prepared to Pay Penalties
If some of your past deductions or credits are disallowed, be prepared to pay some back taxes as well as penalties or interest charges on the amount due. You’ll generally be assessed 5 percent of the underpaid amount for each full or partial month the payment is due, up to 25 percent. Another penalty you may be assessed is an Underpayment Fee, which varies depending on your situation.
In addition to any penalties, you may have to pay as much as 3 percent interest on the amount due for each month it’s outstanding. You may be able to get some or all of these fees waived, depending on the auditor and your personal tax situation.
While the odds of being audited are slim, there’s a chance you could be audited one day. Remember to make the process as smooth and painless as possible by responding quickly, remaining calm, providing documentation, and being honest. Honesty is always the best policy.