Tips on How to Handle an IRS Audit

An IRS audit can be very stressful. The following tips may help to lessen this stress:

1Do not ignore correspondence from the IRS: The IRS will not go away if you ignore them.  Respond by the deadline or you risk the IRS making a decision without you, which frequently results in your owing additional taxes.

2Decide whether you can handle the audit on your own or whether you need to hire professional help: In cases where a professional prepared your return, your fee may have included audit coverage.  Take advantage of it if you paid for it. 
If the IRS is simply asking for documentation to verify something on your return, you probably do not need professional help.  Just be sure to only send in what they are requesting and nothing else.

If you cannot find the documentation the IRS has requested you should seek professional assistance.  It is also a good idea to hire a professional if the IRS is asking you to come into their office for the audit rather than handling it through the mail.  Many times a nervous taxpayer may give the IRS more information than necessary and open the door for the IRS to question additional items on the return.  It is never a good idea to have an audit at your place of business without the help of a tax professional.
Do not be concerned that by hiring a tax professional the IRS will think your return is inaccurate.  In many cases the auditor prefers working with a tax professional because they are not emotionally involved and they will present the requested documents in an organized manner.

3Follow the IRS auditor's lead: Do not give the IRS more than what is requested.  You do not want to send or bring to an audit any document that was not previously requested.  If the auditor requests verification of an item that was not on the original audit notice, do not get an attitude, just tell them you were not prepared to provide the documents and will need additional time to provide them.

While you do not want to say too much at an audit you also do not want to refuse to answer their questions.  This is your opportunity to be heard and convince the IRS that the item(s) they are questioning are legitimate and should be allowed.  Just keep in mind that you should answer only the questions asked.  Never volunteer information.  This may open up the door for the IRS to expand the audit into areas they were not previously investigating.

4Not having a receipt does not mean you lose the deduction: There are other ways to prove a deduction besides providing a receipt.  In a rule resulting from the Cohan vs. Commissioner case, a taxpayer may use "credible evidence" to document an expense.  It is still best to provide a receipt as it is up to the IRS to determine what is considered credible evidence.

There are certain deductions that Congress has determined require strict substantiation.  For these deductions it is essential to retain the proper documents required by the IRS.

5Ask for more time if needed: If you need additional time to come up with supporting documentation, the IRS will normally grant a reasonable extension if you give them a valid reason for the request.  While the auditors are under pressure to complete an audit, they also understand that it sometimes takes time to assemble your records.  Keep in mind that the IRS will not agree to continuous requests without a valid reason and may close your audit if you do not provide the documentation by the deadline.

If you decide to handle the audit on your own, you have the right to stop the audit in order to seek the assistance of a tax professional.  You should definitely stop the audit and make this request if the audit does not appear to be going well or if the auditor mentions that there may be fraud involved.

6Have realistic expectations regarding the outcome of the audit: Many audits result in additional taxes being assessed by the IRS.  Keep your expectations reasonable and remember that if you do not agree with the audit results, you have the right to appeal.  If you keep this in mind it will keep you from getting overly emotional if the audit does not go completely your way.  Getting angry at the auditor will not help and in fact may hurt your case.  Also keep in mind that auditors do not want to have their cases appealed, making it possible to negotiate with them on particular items.  For example, they may not allow your entire mileage deduction (if you cannot provide adequate proof), however, you may be able to negotiate a reasonable mileage deduction with the them.