What to Do When Audited by the IRS

An audit from the IRS can sometimes be misconstrued to be a personal vendetta against you. This isn’t true and more likely the result of a random, computerized process that checks businesses for compliance with tax rules. Once you get a notice that you’re being audited, don't panic. Your preparation for it will be easier due to the IRS being required by law to tell you why you’re being audited.

Response

Once you receive a notice for an audit by mail, respond to it as soon as possible. When you do, you prove to the IRS that you’re not hiding anything. You have a right to ask the IRS for every reason why you’re being audited, including if an informant reported you. The UncleFed’s Tax Board site says some audits are the result of computerized tests that automatically audit certain businesses.

Hiring a Representative

While one type of audit is easier to handle on your own, a business or field audit should require an audit representative to help you through the process. Correspondence audits are the simplest and only require you to send your receipts to verify certain tax deductions you’re taking. But business and field audits usually require you to visit an IRS office (or an audit in your home) so an auditor can look more thoroughly at your financial records. Representatives will work like a lawyer to make sure all questions asked of you are correctly answered. Find a tax audit representative in your phone book, or use Tax Masters, a notable tax representation company that has frequent commercials on cable news (see Resources).

What a Representative Can Do

As lawyers do, a representative will make sure that any questions asked during an audit won’t instigate more in-depth audits or create tax penalties. A representative will also attempt to gather all your critical financial information in as few documents as possible to save you or your business staff time having to sort through every morsel of financial record. This might happen anyway in a Taxpayer Compliance Measurement Program audit that requires every piece of your tax information. This random audit program is done as a way to gather more accurate tax compliance information on businesses.

Dealing with Audits Alone

H&R Block says that if you decide to go at it alone in an audit, the first items you should gather are your tax return, any supporting documentation and all other documents the IRS requests of you. Make copies of all your documents, and give only the copies to the auditor. Overall, it’s best to keep every one of your tax returns and other financial information from the last seven years on file in the event of an audit. This includes information on a home mortgage, all receipts used in your business, personal financial records like 401Ks or IRA contributions, plus copies of check stubs proving you paid your taxes.