Handling a face-to-face audit
Most audits happen through the mail and are easily resolved through an exchanged correspondence. However, if you are selected for an office audit or a field audit, you will need to meet with an IRS agent.
Getting Prepared
The better prepared you are the more relaxed you will be at the audit.
You need to understand your tax return and especially understand the areas of the tax return that are being audited. If you feel like the matters being questioned by the IRS are over your head or if the dollar amount in question is large, you might consider hiring a CPA, tax attorney or enrolled agent. But you need to consider the fees that a tax professional would charge. If the dollar amount in dispute is not large, it probably does not make sense to hire a professional.
One thing to remember with regard to the decision of whether to hire a tax professional or to represent yourself at the audit is that you can always change your mind during the audit itself. If you choose to represent yourself and are feeling overwhelmed in the middle of a meeting with the IRS agent, you can ask the IRS agent for the audit to be suspended so you can talk to a tax professional. The IRS agent is required by law to suspend the audit and give you time to consider possibly hiring an enrolled agent, CPA or tax attorney to represent you at the next meeting with the IRS agent.
Gather your receipts, tax documents and other paperwork. Organize your documents and paperwork. It is your responsibility to prove your income or deductions, and the more organized you are the better chance you have of successfully defending your position with the IRS agent. If you are missing some records such as a Form 1099, call the financial institution and get a duplicate copy so you have the documentation you need for the audit.
When you are organizing your documents, only bring to the audit the documentation and paperwork for the parts of your tax return that are being audited. Don't bring paperwork for items not on the audit notice because you don't want to open up new areas on your tax return for the IRS agent to examine. You want to bring all the paperwork that you need to support your side of the story with regard to the audit notice, but you do not want to bring unrelated paperwork that would open up further potential audit avenues.
Make photocopies of your documents to bring to the audit. Do not give the auditor any original documentation as it is common for documents to be lost.
How to Behave at the Audit
Be polite and courteous to the IRS agent. You aren't going to help your cause by arguing and getting angry. If you disagree with the IRS agent, state your position and why you disagree, but don't argue or be rude.
Talk as little as possible. Stick to the facts and only discuss the areas of the tax return being audited. Friendly chit chat about yourself can give the IRS agent damaging information against you. It's good to have some friendly conversation when you meet the auditor to break the ice but keep the conversation on safe topics such as the weather or sports. Do not offer up any details about your life. Once the IRS agent starts asking you questions, keep your answers as short as possible. Good answers to give when asked questions by an IRS agent are "Yes", "No", "I don't remember", and "I'll need to look into that". If a question requires you to explain more, keep your answer as brief as possible and keep it to the point.
Never lie to the IRS agent. If the agent asks a question that will be hard to answer, give a non-binding answer such as "I will need to look at my records" or "Let me talk to my accountant and get back to you at the next meeting". You then have time to think of the best response and perhaps the subject will not even come up the next time you meet with the auditor.
Receiving the Examination Report
After an audit is completed, you will receive a Form 4549-A, Income Tax Examination Changes. The Form 4549 shows changes proposed to your income or deductions and shows the proposed balance due along with any interest and penalties.
You may not want to agree to the examination report if you have an argument to make. Tell the agent that you are not satisfied and you want to appeal to their supervisor. You may get a favorable deal from the agent at this point.
If the offer is not good enough, you may want to make your appeal to the supervisor and see what happens. If you don't get a favorable offer from the supervisor, you can send a formal protest letter to the IRS District Director notifying that you intend to appeal (the letter needs to be sent within 30 days of the initial audit assessment). You will take your case before an appeals officer who will be strongly motivated to settle your case.
If you lose the appeal, you can still probably take your case to tax court. Just by threatening to take your case to tax court, you may be given the leverage needed to make a deal out of court since the IRS does not want to waste time and money going to court. The bottom line is that the further up you take your case, the better your chances are for a good settlement with the IRS.
Getting Prepared
The better prepared you are the more relaxed you will be at the audit.
You need to understand your tax return and especially understand the areas of the tax return that are being audited. If you feel like the matters being questioned by the IRS are over your head or if the dollar amount in question is large, you might consider hiring a CPA, tax attorney or enrolled agent. But you need to consider the fees that a tax professional would charge. If the dollar amount in dispute is not large, it probably does not make sense to hire a professional.
One thing to remember with regard to the decision of whether to hire a tax professional or to represent yourself at the audit is that you can always change your mind during the audit itself. If you choose to represent yourself and are feeling overwhelmed in the middle of a meeting with the IRS agent, you can ask the IRS agent for the audit to be suspended so you can talk to a tax professional. The IRS agent is required by law to suspend the audit and give you time to consider possibly hiring an enrolled agent, CPA or tax attorney to represent you at the next meeting with the IRS agent.
Gather your receipts, tax documents and other paperwork. Organize your documents and paperwork. It is your responsibility to prove your income or deductions, and the more organized you are the better chance you have of successfully defending your position with the IRS agent. If you are missing some records such as a Form 1099, call the financial institution and get a duplicate copy so you have the documentation you need for the audit.
When you are organizing your documents, only bring to the audit the documentation and paperwork for the parts of your tax return that are being audited. Don't bring paperwork for items not on the audit notice because you don't want to open up new areas on your tax return for the IRS agent to examine. You want to bring all the paperwork that you need to support your side of the story with regard to the audit notice, but you do not want to bring unrelated paperwork that would open up further potential audit avenues.
Make photocopies of your documents to bring to the audit. Do not give the auditor any original documentation as it is common for documents to be lost.
How to Behave at the Audit
Be polite and courteous to the IRS agent. You aren't going to help your cause by arguing and getting angry. If you disagree with the IRS agent, state your position and why you disagree, but don't argue or be rude.
Talk as little as possible. Stick to the facts and only discuss the areas of the tax return being audited. Friendly chit chat about yourself can give the IRS agent damaging information against you. It's good to have some friendly conversation when you meet the auditor to break the ice but keep the conversation on safe topics such as the weather or sports. Do not offer up any details about your life. Once the IRS agent starts asking you questions, keep your answers as short as possible. Good answers to give when asked questions by an IRS agent are "Yes", "No", "I don't remember", and "I'll need to look into that". If a question requires you to explain more, keep your answer as brief as possible and keep it to the point.
Never lie to the IRS agent. If the agent asks a question that will be hard to answer, give a non-binding answer such as "I will need to look at my records" or "Let me talk to my accountant and get back to you at the next meeting". You then have time to think of the best response and perhaps the subject will not even come up the next time you meet with the auditor.
Receiving the Examination Report
After an audit is completed, you will receive a Form 4549-A, Income Tax Examination Changes. The Form 4549 shows changes proposed to your income or deductions and shows the proposed balance due along with any interest and penalties.
You may not want to agree to the examination report if you have an argument to make. Tell the agent that you are not satisfied and you want to appeal to their supervisor. You may get a favorable deal from the agent at this point.
If the offer is not good enough, you may want to make your appeal to the supervisor and see what happens. If you don't get a favorable offer from the supervisor, you can send a formal protest letter to the IRS District Director notifying that you intend to appeal (the letter needs to be sent within 30 days of the initial audit assessment). You will take your case before an appeals officer who will be strongly motivated to settle your case.
If you lose the appeal, you can still probably take your case to tax court. Just by threatening to take your case to tax court, you may be given the leverage needed to make a deal out of court since the IRS does not want to waste time and money going to court. The bottom line is that the further up you take your case, the better your chances are for a good settlement with the IRS.
