Your Number's Up

By Tawny Maya McCray

December 29, 2014 6 min read

One out of every 100 taxpayers will face something extra this year -- a dreaded IRS audit. The following are some tips to help prepare you if you are one of the unfortunate few to be summoned by the Internal Revenue Service.

According to the legal guide publisher Nolo, in an audit, you must convince the IRS that you reported all of your income and were entitled to any credits, deductions and exemptions that are questioned. To do this, you must provide records -- receipts and other supporting documents -- that pertain to the year under audit. If you are missing any records, you are allowed to reconstruct them.

The experts at Debt.org state that documents you may be asked to bring include home mortgage statements, previous tax returns, receipts, brokerage statements, retirement account records and pay stubs. Once the paperwork is gathered, you should understand where there might be problems and determine whether you need legal representation. You may want to contact a tax professional to review your documents and make sure you understand any and all discrepancies.

Certified public accountant Amber Mock-Done says you should be able to provide supporting documents for everything you've deducted on your tax return.

"If everything jibes, you're ready," she says. "If you can't find any support or you realize that you made a big mistake, it's time to probably consult with a qualified accountant and see what your options are."

In the article from Debt.org, it states that an audit in no way implies suspicion of criminal activity and does not imply that you have intentionally made an error. Many tax returns are chosen based on random sampling and income document matching. Some are chosen based on other factors, such as income or unusual deductions.

Other reasons you may be audited, says the article, include conflicting third-party reports regarding income on 1099s or W-2s, home office deductions, rental losses, business use of a vehicle, hobby-related deductions (also known as hobby losses), and foreign currency transactions or bank accounts.

Mock-Done says those taxpayers who choose to have a professional do their taxes versus doing them themselves have a duty to understand what's being included in the return.

"I've seen too many people just rely on their CPA or on H&R Block," she says. "Like, 'Here's my stuff. Give me a good refund. Thank you.' You have a responsibility to review your tax return."

She says people with a standard W-2 are less likely to have a problem, unless they've itemized too many things. It gets more complicated for those who have a 1099 or other business returns.

"If you own a business, maintain a separate checking and savings account that is completely independent of your personal account," she advises.

When it comes to the actual audit, which will take place in person at an IRS office or at your house, you can choose to represent yourself or have someone -- for example, a tax attorney or CPA -- represent you or sit alongside you.

During the meeting, Mock-Done says, it's important to keep the conversation to a minimum.

"They will take anything you say and dig, so be very careful," she says. "Less is more. I wouldn't just start talking; I would wait for them to ask the questions. I think you need to be concise with your answers."

The article from Nolo says you shouldn't expect to come out of an audit without owing something. It recommends that you don't try to compromise on the amount of taxes to be paid; instead, negotiate the tax issues with the auditor.

The article from Debt.org states that an IRS audit may end with no changes, an agreed-upon change or changes that you disagree with and appeal.

You will have options for when to make a payment. You can request a monthly installment plan if you cannot afford the payment.

The article goes on to say that any tax deficiency will accumulate interest at a rate of 9 percent per year from the date of the original return until you pay the bill. The interest is compounded daily. The IRS examiner will often have this information prepared, showing the total you owe.

Based on the type of errors discovered during the audit, you could face a penalty of up to 75 percent of the deficiency, and in a severe case, you could also face imprisonment, the article states.

When all is said and done, a relatively small number of audits are handled by an IRS agent. Routine errors from incorrect math or missing paperwork are often handled through correspondence, the article reads. More than three-quarters of audits are completed through the mail.

Mock-Done says the main thing you can do to be prepared for an audit is to keep your paperwork. According to Debt.org, you should keep all tax returns and records for three years.

"Keeping organized files is a good idea, but frankly, even just shoving it all in an envelope and keeping it is better than nothing," Mock-Done says. "At least you have it."

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