Facing An Audit

By Tom Roebuck

October 19, 2007 6 min read


When the IRS comes calling, don't hide in the basement

Tom Roebuck

Copley News Service

Getting a letter from the IRS can instill fear in anyone, but it is not a reason to panic. Just because they have contacted you does not mean that you will be hauled into a windowless room and grilled about your finances until you can't take it anymore and beg for mercy.

In fact, you will probably find there's a simple explanation for this unexpected piece of correspondence. It could be that you made a math error and the IRS owes you money (don't laugh, this actually happens). You could be one of the approximately 1 million people who forget to sign their return each year. You may have forgotten to include documents or even deductions. Just don't do what many people do when an envelope from the IRS turns up in the mailbox: Ignore it.

"The biggest mistake people make is ignoring that. I can't tell you how many calls we get from preparers who say, 'My client just came in with a 90-day examination and this is the 89th day.' Or worse yet, the 92nd day. The No. 1 thing is don't ignore it," said Erik Lammert, a tax curriculum expert and attorney with the National Association of Tax Professionals.

If your tax records are well-organized and not just stuffed into a shoe box, clearing up any issues the IRS has with your return should be fairly easy. Most IRS inquiries can be resolved by mail - if you can find the right documents - without the aid of a tax professional.

"A lot of the IRS questions are fairly simple and can be handled on their own," Lammert said. "Sometimes if they've been paper filing there's a data-entry error, a 40 gets transferred into a 4,000 or something. And you can say, 'Oh, no no, I didn't have $4,000 of dividends, I had $40 and here's a copy of the 1099 to prove it.

"What the taxpayer has to do then is look at their records. First of all, always read it and always respond to any requests. If necessary, if you don't think you can handle it yourself you can go to your tax professionals and ask them to help you out."

But not all audits can be settled through the mail. There are times when the IRS will want a face-to-face meeting, which can add a whole new level of anxiety. Unless you've been through an office audit before and the issue at hand is a simple one, it would be highly unwise not to at least consult with a tax professional, and a better idea is to bring one with you when you sit down with IRS investigators, Lammert said.

"The taxpayer can do the audit themselves or they can go with the tax professional, or they can authorize a professional to appear on their behalf and not show up in person themselves at all. Some people say that's the way to go, because the taxpayer is liable to blurt out stuff that he shouldn't and tell the IRS more than they already know.

"The IRS is trained to go over everything in detail, but they also do a little chit-chat and sometimes there's hidden purposes behind that - they get you to admit, 'Oh yeah, we just came back from our annual two weeks in Cancun.' And the tax returns show that they've had a net operating loss for the last three years. They're going to say, 'Let's dig a little deeper here and see what else is going on.'"

Not only is it a good idea to watch what you say when facing IRS auditors, but it would also behoove you to steer clear of the fact that you're being audited while talking in the company lunchroom or at cocktail parties. The fewer people that know, the better.

"If you're a businessman, and they're auditing your business, maybe it isn't a good idea to tell your employees or business associates that you're being audited. Because if any of them are unhappy, they may decide that they know what the IRS ought to be looking for. ... There are a lot of audits that are random, but some are due to what they call informant allegations. Sometimes you can tell by the questions the auditors are asking," Lammert said.

When you are first contacted by the IRS about an office meeting, they will specify what area of your return they are scrutinizing. Gather all documents pertinent to their questions, but leave the rest of your tax file at home. If they start to ask questions about other areas of your return - and they might - you can always tell them that you were not notified that those areas would be up for discussion and that you would be happy to schedule another meeting so you can prepare and produce the proper documents.

"They're allowed a lot of latitude about what they can talk about. They can go on fishing expeditions if they want," Lammert said. "There's nothing wrong with saying, 'I don't know. I have those records elsewhere and I can get back to you.' You don't have to answer every question right then and there. It's very rare that they're going to get everything settled and straightened away with one meeting or one exchange of letters anyways."

? Copley News Service

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