The mail includes a plain white, double-window envelope; its return address reads “Internal Revenue Service.” Your pulse quickens a bit. What did I do? What did I miss?
You tear open the envelope and the letter informs you that your tax return for a certain year has been selected for audit. Despite the panic caused by such a letter your rational side asks: What should I do now?
The audit process can be simple or complex, long or short. It depends upon the circumstances of the audit. The best first step is don’t panic. Then there are three other things you can do to make the process as stress-free and simple as possible, as explained below:
1. Contact your preparer.
It is important to let the person who prepared the return know that you received a letter so they can begin preparing records to support the items on your tax returns. They should also be able to tell you what records they may have returned to you so that you can assemble original source documents to verify the items on your return. By keeping good records in the first place and retaining them in an organized manner, you will be much more prepared in the event the IRS requests to take a closer look.
2. Find experienced representation.
Your tax preparer may or may not be the best person to help you through the audit process. Ask questions: Have they represented clients in audits before? What is the process and procedure? What are the potential problems? If your tax preparer does not have the right type of experience, ask for a referral. It is very important that you do not go through it alone or with someone who does not know IRS rules and procedures. A mistake during an audit can be costly. You do not have to deal with the IRS alone and you are allowed to have someone represent you (by completing a simple power of attorney form provided by the IRS). Do not assume you can handle it by yourself. In fact, when one of my clients receives an audit notice, I do not usually allow them to even correspond directly with the IRS at all.
3. Don’t ignore the audit notice.
There are generally three types of audits: a mail audit, an office audit or a field audit. The audits are on a sliding scale from least to more extensive, with the mail audit generally being less intrusive than the field audit, where the IRS agent will want to come to your place of business to verify records. Each notice will have a date by which you must contact the IRS with information or to set up an appointment. Do not ignore the notice or the date by which things are due! This can only make the process more time-consuming and cause it to continue longer than it otherwise would. Failing to timely respond may also cause an agent to make a narrow review of information into a full scale comprehensive audit.
Remember just because you got audited it doesn’t mean you did anything wrong. The audit notice could have been randomly generated or the IRS may just want to confirm something that did not make sense to their computers. Being a bit nervous is understandable. By focusing on the problem, getting qualified help and being proactive in your response to the notice, the process can move along more smoothly and much faster.
You can and will get through the audit process. It's not all doom and gloom. Keep in mind that the majority of audits end with no changes to the return. So stay positive. There is often a happy ending to the process.