Going through an IRS audit can be time-consuming and very inconvenient. But with the right preparation and planning, you can win your case and maybe even come out on top with the government owing you some extra money.
It may not be easy, but it can be done. The trick is to prepare, prepare, prepare. And with a little bit of luck, you can win your IRS audit and come out to fight another day.
Here are a few tips on how to increase your chances of winning an IRS audit.
Know whether it’s a correspondence or in-person examination
In 2011 the IRS performed 1,564,690 individual audits, but only a quarter of them were done the old-fashioned way – with an IRS agent visiting a taxpayer’s home donning a suit and tie. Correspondence exams typically require you to mail documentation of an expense or deduction to the IRS, leaving little human interaction with an actual IRS agent. But if your information doesn’t match what the IRS receives through its automated third party reporting system, your best bet may be to just cut your losses, pay the extra taxes, and move on.
Keep on top of all communications
If you do get that audit letter, make sure to reply in writing. You’ll typically get 30 days to respond, and ignoring an IRS audit letter altogether can waive your ability to claim certain items and expenses on your returns. If that happens, you’ll get a tax bill without the ability to contest it.
Don’t do it alone
Going head-to-head against the IRS is like riding a motorcycle without a helmet: you may survive, but one wrong turn and the crash can lead to serious consequences with lasting effects on your business.
When you’re certain you’ll be the target of a full-fledged IRS audit, hire a tax attorney or tax professional to help you make your case. Their knowledge of IRS rules and procedure will go a long way to get on the same level as your IRS examiner and neutralize his or her tax prowess. This is especially true where the dispute covers a grey area of tax law where complicated and novel legal arguments must be made before a tax court.
Make your paper trail
After you learn what part of your tax situation the IRS is auditing, gather any and all relevant documents. Conventional wisdom is that records should be kept for three years after you file a return, but if you can’t obtain a copy of a necessary receipt or bill, contact the business or charity that originally provided it.
The stakes are pretty high when it comes to verification documents sought by the IRS. If you can’t get them, unsubstantiated deductions or claims can be cancelled – so get creative in getting those documents.
Utilize the appeals process
Some estimates claim that just 10 percent of taxpayers appeal their audits, leaving it a possible option for a great deal of taxpayers.
If you’re unhappy with your audit, taking it up with the IRS Office of Appeals is another option. The office is comprised of former auditors knowledgeable in the audit process and are given greater leeway in resolving audits.
An upside to appealing your audit is that it delays your payment due date – sometimes by months – so you can gather funds to pay the bill. However, if you lose your appeal, penalties and interest will continue to accrue and increase your tax bill.
The first step to appealing your audit is to not sign the audit report sent to you. An official protest must be filed within 30 days. Sometimes you can obtain an extension to file the protest.
But the additional tax owed can determine procedure.
If less than $2,500 is owed, an appeal can be requested by asking your auditor. If the total figure is between $2,500 and $25,000, a detailed letter of protest should be filed, or you can file IRS Form 12203 “Request for Appeals Review.” If the disputed amount is greater than $25,000, then filing Form 12203 is the sole avenue for appeal. When filing these forms, consult with a tax professional. He or she can provide valuable advice as to filling it out correctly.