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How to Survive an IRS Audit

Are All Audits Alike?

There are three basic types of audits, and the audit letter will explain which one applies to you:

1. A Correspondence Audit is for minor mistakes. Theletter from the IRS will tell you what documentation to send them. Itmay be as simple as signing your return. Once corrected, you�re done.
2. An Office Audit requires that you appear on a specific date and time at an IRS facility with your documentation.
3. A Field Audit means the auditor comes to yourbusiness or home. The IRS usually does a field audit only if acomplicated return involves a business.

Will I Have Time to Prepare?

You will have time to prepare-usually about six weeks.

If you need more time, ask for it. The IRS is very good aboutallowing you to reschedule. The audit letter includes instructions anda phone number for rescheduling.

What Should I Do to Prepare?
Read the Letter

The letter that the IRS sends you tells you what documents to get ready. Read it carefully.

Organize Your Records

The more organized you are, the better you look. Tip:If you took deductions for Employee Business Expenses or used aSchedule C, make sure that your business activities and records areseparate from your personal records and activities.

Find Your Receipts

Ifa receipt is missing, try to replace it. For example, you can usuallypersuade your credit card company to fax or mail you duplicate recordsof your transactions. If you face an audit for deductions for EmployeeBusiness Expenses or for your Schedule C, get proof of deductions suchas

• Auto expenses
• Travel costs
• Computer purchases
• Meals and entertainment expenses

The burden of proof for a deduction is on you.

Do Your Homework

Ifyou filed a Schedule C, read one of the IRS Audit Technique Guides foryour type of business. You can find these guides on the IRS websiteunder Market Segment Specialization Program (MSSP).The guides were written to prepare auditors for different types ofbusiness situations. This makes the guides a good source of informationabout what the IRS will be interested in, when looking into yourbusiness.

For example, the guide for the Bed and Breakfast industry includes questions such as:

• Do you receive tips for goods or services?
• Do you barter for goods or services?
• Is there an extra fee if customers have pets?
• Which meals are included in your regular rates?
• Is there a minimum stay?
• Is this a seasonal activity?

Protect Yourself

Filean extension on your current year's tax return. Your current year's taxreturn is open for audit if you file it while being audited for prioryears. Wait until the audit is complete before filing your return.

What Should I Do During the Audit?
Don�t Go Alone

Atax professional or an attorney can help. They speak the language andknow how to answer an auditor's questions. Even more important, theseprofessionals know when not to answer a question and when to ask formore time to look into an issue or area of concern.

Provide Requested Information

Providethe information requested by the IRS, and nothing more. You may feelnervous. That�s certainly understandable, but nerves may lead you totalk more than you should. A seemingly innocent statement on your partmight lead an auditor to investigate areas that he or she had notplanned to look into.

Example

Your Winter Ski Bed and Breakfast is audited. The auditor asks ifthe business is seasonal. You can state that you are open from October15 through April 30. You do not need to state that during the summer,you close the B&B and head to Hawaii where you work as a conciergeat a seaside resort from which you often receive cash tips.

What Should I Not Do During the Audit?
Don�t Have an Attitude

Bepatient as well. The auditor may not know your business and so may askquestions that seem obvious to you. However, it won't do you any goodto make the auditor dislike you or get mad at you. The auditor probablywants to wrap up as quickly as you do, but if the auditor believes thatthey need more time to get the right answer, they will take it.

Thus, it's in your best interest to be prepared, courteous, and thorough.

Don�t be Afraid to Say You Don�t Know

Ifyou aren't sure about a question or you need to go look up theinformation - ask for time to track down the answer. It's better torequest more time than to appear as if you don't have the requestedinformation or you are hiding something.

Don�t Make Assumptions

Don'tassume you are doomed. Consider the following real-life example of anot-so-unusual situation involving the lack of receipts and records.

A tax professional represented a client in an audit who had claimedsubstantial gambling losses against her equally substantial gamblingwinnings. Because she often played the slots or the video machines,there were no receipts to substantiate her individual losses. Hisclient was very concerned about the lack of substantiation for herlosses.

Prior to the audit, the tax professional prepared a schedule showingher gambling activities for the year and during the audit he explainedthe client's gambling practices and habits. As it turns out, theauditor had enjoyed a trip or two to Las Vegas each year and understoodthe client's gambling losses. The audit lasted no more than an hour,resulting in a no change report issued by the IRS agent.

What Are My Rights?

You'll find that the IRS employees generally treat you fairly. If not, take a look at IRS Publication 1: Your Rights as a Taxpayer. You have the right to receive professional and courteous service. Publication 1 says:

Don�t Be Rushed Into Making Decisions

Youhave the right to appeal if you do not agree with the decisions of theauditor. Do not let an IRS employee pressure you into signing anythingthat you don't understand or that you don't think is fair or correct.You can always request time to consult with a professional.

For more information on appealing an auditor's decision, see IRS Publication 3598: What You Should Know About the Audit Reconsideration Process.

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