If you receive a notice by letter or phone call from the Internal Revenue Service (IRS) that they are auditing your taxes, what do you do? You can address the audit in an appropriate and timely manner by follow these six steps:
- Do not panic. The first thing to remember is not to panic. You are not alone. The IRS audits between approximately 1% and 1.5% of taxpayers each year. That is over one million audits annually! Many IRS audits are of returns with an unusually large number or type of deductions that may in fact be legitimate. Remember that just because the IRS is auditing you does not necessarily mean that you have done anything wrong.
- Respond to the IRS tax notice. Do not ignore the tax notice. The IRS generally expects a response within 60 days. In an IRS tax audit, the IRS considers you guilty until proven innocent. If you do not respond, the IRS will take action that is generally to their benefit. This action could include increasing the amount of tax you owe so that you must pay additional money to the IRS. The additional money could include penalties if your IRS tax payment is late.
- Read the IRS tax notice to understand what the IRS wants. The audit notice should indicate the reason for the IRS tax audit, the timeframe for providing a response, and whether the audit is one you must respond to by mail or in person. If the IRS tax notice indicates a balance is due because the IRS is questioning a calculation on your federal tax return, the IRS tax notice will indicate the amount as well.
- Consult with a tax advisor or tax lawyer. A tax advisor can be the Certified Public Accountant (CPA) or other preparer who prepared your return or a tax lawyer. This individual should be someone who knows the tax laws and your rights as a taxpayer. They should be able to advise you on how to respond to the specific item raised by the IRS in the audit notice to limit or eliminate your exposure to additional tax liability.
- Provide an organized response. Prepare a written response to the IRS or have your tax advisor prepare one. The response should address only the issue raised in the IRS audit notice. Supplying additional information could raise other questions with the auditor. Also provide copies of any documents that support your response. Do not supply the original documents, as you may need the original documents again in the future.
- Be prepared to follow up with the IRS. The initial response you provide to the IRS may not answer all of their questions. The IRS will follow up with another letter or phone call to you if they require additional information or explanation. If this happens, repeat the above steps until the matter is resolved.
Do I need to hire a tax attorney?
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Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.