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The prospect of a tax audit strikes fear into the heart of even the most careful taxpayer. The sheer power of the Internal Revenue Service can make it seem threatening, when in reality the IRS is a bureaucracy made up of workers trying to help taxpayers follow the nation’s rules. Audits are rare (on average, about 1 percent of taxpayers are audited) and don’t have to be traumatic. Here’s what to expect:
If you’ve pictured an IRS agent showing up at your door with a briefcase, your mental image is out of date. These days, three-quarters of tax audits are completed through correspondence, and they only focus on a few specific details. For instance, you might get a letter asking you for more information about one specific deduction you claimed. If you receive a letter of this type, it will tell you what type of documentation you need to mail to the IRS. Following through on this request by the deadline (usually 30 days) generally resolves the issue.
Some audits are conducted through an in-person interview, either at an IRS office or (if you’re a business owner) at your place of business. The IRS will tell you ahead of time which kinds of records they need you to have available; they are very clear about their requirements. While the agent will be seeking to understand the numbers on your tax return, they won’t be going on an open-ended fishing exploration, and you should not bring any information beyond exactly what they have requested. If you need more time to gather the documentation that the IRS is requesting, you can phone the agent whose number is on your letter and ask them if you should reschedule. In general, audits must be completed by three years after the date the tax return was due.
If you have a tax preparer or an accountant, that person may be able to help you respond to an audit request. If the audit will involve an in-person interview and your financial situation is complex, you may find that paying an accountant to accompany you to the interview is a good investment. He or she will help you prepare for the audit, and can even speak for you during the actual interview. You will find that the biggest online tax services, like TurboTax, also offer audit protection with many of their packages. You can check out this review of TurboTax to learn more.
Keeping good records is the best way to remove any anxiety about an audit. If you should happen to be chosen for an audit, you’ll know that you can substantiate any claim you made on your tax return. You should keep files with three years’ worth of expenses and canceled checks, and (if you have a small business) six years’ worth of payroll information.
If the auditor ends up disallowing a credit or deduction that you claimed, and you owe extra tax, the IRS will let you arrange a payment plan. In the end, being audited is likely to be far less dramatic than your fears might lead you to expect.