How I Survived an IRS Tax Audit

When my husband and I were both in graduate school, we were audited by the IRS for over $13,000 in unpaid income tax. Both my husband and I earned a grand total of $35,000/year in student stipends and fellowships from our school and individual laboratories, respectively, so this issue was of great concern to us. We also could not understand how and why such an income tax audit had occurred.

At the time of the tax audit, I was under the impression that student stipends were not taxed. My parents, who at the time completed my tax return via a tax preparation agent, had actually been told that stipends were not taxed. As a result, I never investigated my income tax situation.

Due to bad information and voluntary ignorance, I ended up not paying my income taxes for four years. To make matters worse, I informed my husband that student stipends were not taxable and he took me at my word. As a result, both he and I did not pay our income tax for several years.

Once we started receiving correspondence from the IRS, we quickly brushed up on our knowledge of taxable income and found out that we owed a good amount of money. Fortunately, some of the money could be declared tax-free because we had used a good amount of it on books for school. After submitting supplemental tax forms, we ended up owing about $10,000 in back taxes.

The IRS was asking that the remaining money be paid in two weeks, yet we had a revolving bank balance that totaled no more than $300 at the time. I called the IRS and explained that we would need additional time to pay off such a large sum. Apparently, the IRS must have significant experience with people who cannot pay off their back tax, because we were set up on a five year repayment plan almost immediately. Because I had attempted to work out our back tax situation, the additional late fees were removed from our bill.

What ensued was the following: every month, my husband and I would receive an income tax installment bill from the IRS for roughly $180 (including interest). At some point along the way, we amassed enough cash to pay off the entire sum that was owed. However, balancing back tax with the income tax regularly owed for the year was tough; sometimes, it seemed like all our cash was going to the IRS.

By the time our tax audit was finished, we had learned some very critical lessons about tax. First, never assume that any income is tax-free and, second, if an IRS audit occurs, resolve the issue instead of hiding from it. Doing this will save time, frustration, and additional penalty and interest fees.

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