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How to Prepare for an Audit

When you ask people what the worst day of the year is if you are a taxpayer, most people will respond April 15. “Tax Day” may conjure up images of people rushing to finish up last minute paperwork, long lines at the post office, and other unpleasant memories, but those things are actually a piece of cake compared to the horrors of being audited. When that envelope marked “Official Government Business” with the return address of the Internal Revenue Service (IRS) in the upper left hand corner shows up in your mailbox, you quickly find out what the taxpayer’s worst day of the year truly is.

Why am I Being Audited?

One of the worst things about being audited is the assumption that you have done something wrong. Though the IRS claims they do some random audits for quality control purposes, the vast majority of the people they are auditing have done something that has caused their returns to be flagged for a more thorough inspection.

A lot of audits are triggered by:

  • Numbers that suggest the figures have been rounded
  • A large amount of cash income
  • Extreme variations between this year’s income and that of previous years
  • A large number of deductions
  • W-2s (and other forms) that don’t match reported amounts

You may also be selected for an audit if people you work for or do business with are being audited, or have been recently audited.

Tips for Surviving an Audit

Just because you are being audited doesn’t mean you have done anything wrong. In fact, some people come away from an audit with more money in their pocket because the audit reveals they paid too much to the IRS. So, the first tip is to keep calm! Panicking about the audit process will only make it worse than it actually is.

It is possible to go through the audit process alone, but hiring a professional who has been through the audit process before is strongly recommended. Because the professional is familiar with the process, he or she is going to know what steps to take to shorten the process. For example, some audits can be resolved with a simple exchange of documents verifying certain information that the IRS has questions about. A professional will know if this is a possibility, and will know exactly which documents need to be exchanged. Sending more or less data than the government asks for causes you to run the risk of prolonging the process or inviting additional inquiries.

One of the added benefits of hiring an experienced tax attorney when you are being audited instead of just your typical tax professional is that anything you discuss with the attorney is covered by attorney-client privilege. This privilege can protect information you disclose from discovery should the government decide to press criminal charges against you.

Whether you are going through it alone or working with a professional, getting your tax documents in order is a priority. Be prepared to pull a copy of the return you filed and all of the supporting documents like W-2s, 1099s, receipts, and copies of bills. If you can’t find all of the supporting documents, think about who else might have a copy. For example, your employer will be able to get you a copy of your W-2 and/or 1099s, your bank will have a record of how much interest you paid on your mortgage, and your local tax collector should have a receipt indicating how much you paid in personal property taxes.

Treat the audit experience as you would treat being on the witness stand at a trial. Answer the questions asked of you as precisely as possible. Give all the information requested, but don’t volunteer anything extra. As in a court of law, anything you say (or paperwork you hand over) can and will be used against you!

With these tips you can successfully survive an audit, and have a real horror story to tell the next time people start complaining about the terrors of Tax Day.

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