What to Do If You Are Audited

You are enjoying an ordinary day when you walk out to your mailbox and suddenly fear strikes in your heart. In your hand you hold a letter with a return address marked Internal Revenue Service. You immediately tear into it and find that you are being audited. What do you do now? First of all, you must understand that there are three different types of audits. A correspondence audit is a letter that the Internal Revenue Service (IRS) sends asking for more information. All you need to do is make copies of your original documents that pertain only to what the IRS is requesting and mail the copies to the IRS. Unless other questions arise, you are done with the audit. This is what a good percentage of audits come in the form of. A field audit is an audit in which an IRS agent will come to your home or business to review the return. This usually happens when the return is complicated and involves business expenses. The last audit is an office audit. For an office audit, you will be asked to bring in your paperwork to the IRS office on a specific date and time.

You should remember that with any of these audits only the pertinent paperwork needs to be shown to the agent. Showing or even bringing other documents with you to an audit will open the audit up to a lot more scrutiny For field and office audits, it is recommended that a CPA, tax lawyer, or tax advisor be present during questioning. The tax laws are complicated and you need someone on your side who understands them. If your return was prepared by someone else, be sure to ask them questions regarding the return prior to your meeting. In some cases, this person can represent you in the meeting.

For any type of audit or return, you must keep all of your receipts and data for seven years. If you claim deductions and then do not have a receipt for it, the IRS will more than likely reject the deduction and therefore you will owe money. It is also a smart idea to keep notes of why you took certain deductions or used certain numbers.

People in cash businesses such as hairdressers, waiters, and others who receive tips are one of three groups who are targeted more often than others. People in a cash business do not always report their total earnings and the IRS is aware that this occurs. If you are or were in a cash business, be sure to report your earnings correctly and keep all the proper paperwork. Professionals in certain careers and people taking large deductions are also prone to being audited. The IRS will more than likely challenge a medical deduction and/or charity deduction. Medical deductions can only be taken if your medical expenses for the tax year exceeded 7.5% of your income. The statistical norm for charity donations is $250 per year. Deducting an amount that is considerably over this norm will make the IRS curious. As with your other deductions, make sure you keep your medical records accurate and you get a receipt (a cancelled check does not suffice) for your charity contribution. One more note on charity contributions, just because you give money to a charity does mean it is contribution. For example, if the charity is offering a golf savings booklet and you purchase it, you are not entitled to a deduction. In this situation you are receiving a product in exchange for your money. If for example you go to a charity ball that cost $250 and at the ball you receive a meal and entertainment, you more than likely will not be allowed to deduct the $250. The charity is required to tell you how much you can deduct because yet again you are receiving a service of food and entertainment. The services must be deducted from the cost of the ticket.

Some final tips in case you are audited:

-Do not rush. Take time to prepare and gather your documents. If you do not have enough time, do not hesitate to ask for an extension.

-Be sure to read the Taxpayers Bill of Rights. This will help make sure that you are not taken advantage of.

- Make copies of everything you give to the IRS.

-If you do not like the decision of the auditor, there is an appeals process. You can appeal to the agent's supervisor, then the Appeals Division, and finally the US Tax Court.

Last but not least, do not lie and always be friendly. These two things will take you further than you ever imagined.