Don’t you feel special?
According to data from the IRS, very few income tax returns actually get audited each year. In fact, the IRS reports that it audited only 0.84% of all 2014 individual income tax returns filed (according to the most recent data available at the time of writing, found here).
But somehow you beat the odds and now the IRS wants to audit your tax return (You received a “Your return has been selected for examination” letter). It’s very rare that the IRS examines only one or two items that are straightforward and easy to defend; more likely there will be some areas of the examination where the tax law either isn’t abundantly clear or maybe, just maybe, you might have made a mistake. What do you do now? Here are a few suggestions to help you get started:
- Check your records. The IRS will state exactly which return (or returns) it is examining, and which items on those returns it has particular interest in. Compile and Assess the quality of the records you kept, can you substantiate all your deductions? Are your records mostly good but with a few holes? Did you even keep any records?
- Perform your own “Shadow Audit”. To the best of your ability, get inside the mind of an IRS agent and take a hard look at the documentation you have. Familiarize yourself with the relevant tax code and try to find reasons to disallow your deductions. Maybe Mr. IRS doesn’t think that this expense was really “necessary” for your business, or maybe Mr. IRS thinks you received something back in return for your charitable contribution. Try to pick your defense apart and hand yourself a big bill… can you do it? If you can, was it easy?
- Comply but don’t be overly helpful. Ever heard the phrase that an attorney who represents himself has a fool for a client? A similar principle applies to IRS examinations. You do want to have ready answers to the questions the IRS is likely to ask but be careful, it’s very easy to accidently give too many details or sow some seeds of doubt in an agent’s mind and see a simple examination become a very complex one. For example: suppose you defend a deduction by telling the agent you’ve always taken it in the past and it’s never been questioned. Guess what? Now the agent is recommending the IRS audit the last few years of your returns. Oops.
- Get help (and quickly). The stakes are high with an audit, so paying a professional to take care of it for you is always worth considering and (from my perspective) is usually the right call, especially if you’re unclear about a section of the tax law or if there is a substantial sum of money involved. Whether you’re just looking for some help preparing for the audit or if you’d prefer a professional to go in your place, reach out to me and I can help you with the process. Until then, stay safe out there.
P.S. In an audit it is especially important that you act quickly and don’t panic. If that isn’t your strong suit or if you aren’t sure how to move forward contact me for a free consult.