Tax audits are among the most common financial fears, but they don’t have to be – especially with your CPA by your side.
Truthfully, though, unless you make more than $200,000 a year, your chances of getting flagged for audit are pretty slim. And with IRS budget cuts severely limiting their ability to even check returns for accuracy, you can bet that the odds are in your favor. In fact, less than 1% of all tax returns filed in any given year get audited.
If your return does get singled out, you’ll most likely be able to handle the matter by mail, never setting foot in the IRS offices. Most tax audits are handled that way – nearly 75% of them – and they often involve simple error corrections. In fact, sometimes, the mistake will be resolved in favor of the taxpayer, and the audit will close with a refund check.
Of course, most audits aren’t resolved that painlessly. Though they all start with a letter from the IRS, sometimes taxpayers do get called into a field office. The letter will have an appointment time listed, usually at least a few weeks out – if you need more time, or have a conflict, all you have to do is ask them to reschedule the audit.
The letter will also spell out very clearly what the agency is questioning, and let you know what kinds of records you’ll need to supply to clear up everything. Basically, you’ll need to bring the records you used to prepare that tax return. To help make sure things will go the way you expect, you can pre-audit your own records, making sure you have proper documentation to back up the information on your tax return.
If any paperwork is lost, don’t panic – you can reconstruct that missing information. Check with vendors for copies of invoices or statements. Ask your bank for copies of canceled checks. Recreate the events surrounding a breakfast meeting by getting a written statement from the client you pitched.
Remember: your records don’t need to be letter-perfect. They just need to make sense. For example, it’s reasonable that it cost $36 to overnight an envelop to your insurance carrier, even if you can’t find the FedEx receipt. Also, the auditor will be more likely to overlook a missing receipt or two if you can provide the rest of the information he’s looking for – but if your documentation leaves a lot to be desired, he may be less willing to give you the benefit of the doubt.
If you can’t stomach the idea of facing the auditor alone, you don’t have to. In fact, you don’t have to go to the meeting at all. You can hire a representative – like your CPA – to go in your place. All it takes is a simple IRS Form 2848 which gives your representative a special power-of-attorney for just that purpose.
Should you decide to go, expect to spend at least a few hours in the field office, most of it watching the agent go over the numbers. When he’s done, he’ll explain all the changes he proposes, and how he came up with them. If you agree with him, the audit is done. If you disagree, state your position with confidence – the auditor may be willing to compromise to close out the audit. Otherwise, even if you’ve been flying solo to this point, you can stop the audit, and bring in a CPA to represent you the rest of the way.