We can all expect to get bad news occasionally throughout our lives and for most of us, the good news outnumbers the bad, so we shouldn’t complain too much. However, that’s hard to remember when you receive a letter from the IRS notifying you of an audit; an experience I was treated to not long ago.
Let me give you one very important tip before I go any further: When you receive notice of a pending audit, quickly take a “chill pill.” As many say today, “It is what it is.” Accept that it’s happening and then move on to preparing, which all of us should be doing each year as we file our returns. After all, the best way to enter any audit with confidence is to have all your documentation ready and have it well organized. If you fail to do that, you can’t blame the IRS for the extra stress you suffer putting everything in order.
To be sure you have the required documents, you should keep at least three years worth of tax returns and the records that back up all the income and expense data used for filing them. This means keeping your receipts and checkbook ledgers/stubs. Auto expenses are often a stumbling point; use a good mileage app. In fact, track as many expenses as possible online and then get printouts at tax time to keep in your files.
Here are a few more tips to help you be prepared for an audit:
Know that it can happen to you. You don’t have to be pulling in a huge income to be audited, although your chances increase when your income goes up. IRS computers look for deductions that fall outside of the “norms.” If you have a modest income and suddenly claim a huge charitable donation to your church, it will be a red flag.
Find out why you are being audited. The letter you receive from the IRS should make it clear what the IRS is after. It’s likely that a certain part of your return is under scrutiny. If you can’t tell from the letter, contact the IRS and ask why you are being audited.
Sit down with your tax preparer. If a CPA or other tax professional handles your tax return, gather up your documents and schedule a meeting. I found it very helpful to conceive a “worst case scenario,” and frankly when we did that, the picture wasn’t all that gloomy; now I feel I’m mentally prepared for any outcome. I took the additional step of giving my CPA power of attorney to meet with the IRS auditor. With all the directions I’m being pulled by my schedule, that was a big relief for me. If you talk to your tax preparer and the stakes seem pretty high, you may want to engage a tax lawyer.
I hope you never have to sit across the table from an IRS auditor, and if we can believe news reports, your chances should decrease somewhat this year. Budget cuts are stretching IRS employees thin and fewer audits are said to be one of the consequences.
However, fewer audits may put auditors under pressure to increase the tax revenues they recover. If you need any added incentive to maintain excellent documentation and be organized, that should do it.
