What to do if you get audited
Never ignore a letter from the IRS. Sometimes you can solve the problem by sending more information, and sometimes you need a professional.
By now you’ve sent in your tax returns (unless you filed for an extension), and you may have already received a refund check. If you’re lucky, that’s the only letter you’re going to get back from the Internal Revenue Service.
But some are not so lucky and wind up getting audited.
Seventy percent of audits are just a letter asking for more information about your tax returns, and you’re asked to mail back forms proving your income or deductions. In other cases you’ll get an invitation to meet with an agent to discuss your tax forms, a scenario that sends many taxpayers into a panic.
In either case, there’s usually little need for panic, but there are certain steps you should take. To find out the best (and worst) course of action in the event of an audit, we talked to a certified public accountant and a tax lawyer, both of whom have worked for the IRS. Here’s what they told us you should do if you get that dreaded letter.
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Don’t ignore the letter
"The first thing to do is respond," says Cindy Cattran, a CPA and the tax principal for the Ann Arbor, Mich., office of the accounting firm Rehmann. "Ignoring them is the worst possible thing you can do. It won’t go away."
With that said, you do have a bit of leeway on how long you take to respond to the request. While you should write back as soon as possible, you can ask for more time to gather the paperwork and forms – within reason, anyway.
"If you don’t have [the requested paperwork], ask the agent for a two-week extension," says Kelly Erb, a tax lawyer who blogs at TaxGirl.com. Still, she warns that there’s a limit to the agency’s willingness to grant an extension. "They’re not going to give you a two-week extension because you couldn’t print something out last night … Most of the things they’re asking for is stuff you can get pretty quickly."
Decide whether you need representation
Most of the time the letter you get in the mail is just a simple request for information – the IRS just wants you to mail in your 1099 form, for instance, or they want to see receipts for the business meals you deducted. In that case, just sending in the requested paperwork is usually sufficient, and you don’t need to get your lawyer or accountant involved.
If you can’t find the information they’re looking for, you’ll probably want to call a professional to advise you on your next move. And if you’ve been called in to meet with an agent, you should almost certainly bring in outside help.
"I recommend to clients that they take me with them or let me represent them without them going," says Cattran, a former IRS agent. She explains that you can grant power of attorney to either a lawyer or an accountant, and let him or her handle everything while you stay home.
And don’t think that bringing a lawyer will annoy the agent or make him or her think you’re guilty – it will do quite the opposite, actually.
"It’s been my experience that they prefer to deal with an attorney," says Erb, who clerked with the IRS during law school. She notes that a professional will prepare the requested information in a way that’s easy for the agent to read, and will do so in a dispassionate and professional way. "I don’t stare at them and say, 'that’s not fair,' " Erb says. "I don’t have emotional baggage."
Tell them what they want to know (and nothing more)
Erb says that only about 2% of audits are random; the rest of the time, the IRS has very specific questions it wants answered, and will request forms and receipts accordingly.
That means two things: Send or bring all the forms you're asked to bring, and answer all the questions to the best of your ability.
That second point is important. Whereas keeping your mouth shut is usually best when you’re getting interviewed by the police, in an audit you’re usually best served by stating your case and answering all of the agent’s questions. After all, if the IRS is calling you in to talk about how much income you reported, it’s probably because the agency believes you’re underreporting. The audit is your opportunity to convince the IRS otherwise.
"They’ve kind of decided what they think they know," says Erb. "Most of the time they’re giving you an opportunity to explain why what they’ve decided is wrong." Sure, you have every right to refuse to answer their questions, but the result will be that they just disallow your deductions and assess the taxes and penalties they think you deserve.
With that said, it’s possible to overshare. Cattran recounts one audit in which the taxpayer took the opportunity to brag about how much money he’d made that year.
"Some taxpayers just come in and unburden their soul," she says. Tell them what they want to hear, but if you go in there and start confessing all your sins it could wind up costing you.
Negotiate and appeal
"Don’t start from the position that everything can be bargained down," says Erb, noting that if you’re found to have underreported your income, there’s not much room for negotiation. Still, "once the audit is done, it can always be appealed, so they’ll cut you a deal that will make you happy because they don’t want it to drag on."
Once the meeting is over, the agent will assess any taxes and penalties you owe. At that point, you can either sign off on the assessment and pay the piper, or ask for a supervisor to get a second opinion. And if the supervisor doesn’t tell you what you want to hear – and you’re willing to shell out some legal fees to fight for what you think is right – you can take your chances in tax court.
"Their lawyers are ready to negotiate, so I’ve settled a lot of cases [before going to court]," says Erb. "Still, if they think they’ve got you, they’re not going to let it go."
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