How to Survive an IRS Audit

The Dreaded IRS Audit Notice

Few things cause more stress than a letter from the IRS telling you that one or more of your tax returns is being audited.

And the stress is understandable. “Tax relief companies” warn you on television of the IRS’s power to garnish your wages, levy your property, and seize your assets. And there are decades of stories about the IRS targeting certain taxpayers for political purposes.

The average citizen stands little chance of understanding more than 6,000 pages of the US tax code. The IRS is by far the largest collection agency globally, collecting more than $2.4 trillion every year from more than 234 million returns.

And the IRS is powerful enough to convict even famous and wealthy celebrities like Martha Stewart, Stephen Baldwin, and Willie Nelson. Some stars were sentenced to prison time, including Nicholas Cage, Wesley Snipes, Leona Helmsley, and Pete Rose. And the IRS is legendary for sending Al Capone to jail.

So, when you receive an audit notice from the IRS, it is only natural that you start to worry.

What to Do When You Receive an Audit Notice

The first thing to know is that the IRS sends audit notices by mail. The IRS never initiates an audit by telephone.

Many intelligent but unsuspecting taxpayers have fallen prey to a scammer claiming that they were under audit by telephone. If you receive one of those calls, hang up and report it to the authorities.

But if you receive a valid IRS audit notice, here is what to do.

  • Take a breath. Audits are rarely as bad as you imagine.
  • Read the audit and contact a professional. At CE Accounting, we understand and deal with audit requests all the time. Even if you have done nothing wrong, and even if you made no mistakes, you should have a professional talk to the IRS for you. The vast majority of IRS agents are friendly, well-meaning people. But they are in the business of collecting money and they know the IRS code much better than you.
  • Respond The worst thing you can do to an audit notice is ignored it.

How is the Audit Conducted?

The IRS conducts audits in person or by mail. You will be notified of how the IRS wants to proceed in the letter.

If it is an in-person field audit, it can be at your home, place of business, or at our offices at CE Accounting. Audits are also done at the IRS offices. The IRS will provide contact information and instructions in the letter.

Suppose the IRS requests an audit by mail. In that case, they will ask for additional information about specific items shown on the tax return, like income, expenses, and itemized deductions. 

Odds of Being Audited and the Typical Outcomes

According to the IRS, tax audits are statistically rare, with about 0.4% of all individual income tax returns audited.

The IRS audit is a formal review of your tax forms and financial documents. It is meant to ensure that you filed your tax return correctly and followed applicable tax laws.

At the end of the audit, one of three things will happen. Either you owe the government money, or they owe you money, or the auditor accepts the return as filed. Unless there is fraud or something terrible happens during the process, no one is going to court or jail.

Why Am I Being Audited?

Your tax return may be audited for several reasons, including:

Random. The IRS does computer modeling and statistical sampling of random returns within specific criteria.

Related examinations. You might be selected if your tax return is connected with another taxpayer’s return under audit.

Red Flags:

  • Failing to disclose taxable income. Don’t forget the IRS gets copies of 1099s and W-2s.
  • Neglecting to report cryptocurrency transactions. 
  • Typos like incorrect Social Security numbers.
  • Making math mistakes.

Filing your return completely and accurately will help reduce your chances of being audited.

Top Audit Tips

Get professional help early. Contact Us or a tax attorney. Let us communicate with the IRS for you.

Gather your records and documents. Make them neat, organized, and easy to follow. You don’t want the IRS forced to guess and then penalize you for not keeping appropriate business records.

Delay the Audit. Postponing the audit usually works to your advantage. Request more time whenever needed to get your records in order, etc. The IRS must complete an audit within three years of the tax filing unless they find tax fraud or a significant underreporting of income.

No Field Audit. If the IRS wants an in-person audit at your home or office. Schedule it at our office at CE Accounting or a tax attorney’s office or go we will go with you to the IRS office.

Be Prepared to Pay. The IRS will probably say you owe something. The average adjustment for an office audit is about $4,000 and about $17,000 for a field audit.

Short Answers. This is like being in court. Never lie during an audit. Answer only what is asked and do not volunteer any information. Let your tax professional do most of the talking.

Negotiage.  We will guide you on this.

Appeal the Result. If you disagree with the report, you can ask to meet with the IRS agent’s manager to see if you can reach a compromise. This is best handled by your tax professional. And you can always appeal the decision by going to Tax Court, but realize the process is long and usually expensive. You are usually money ahead if you can settle all matter at the audit stage.

Let Our Team Help You

If you received a notice of audit, or are concerned about being audited by the IRS, call us and let us help. Our qualified team of CPAs is familiar with the audit process and can show you what to do right now to plan for a successful audit outcome.

​​ At CE Accounting, we don’t just file forms and crunch numbers. We analyze your personal and business goals to minimize your tax obligations.

We keep up with the laws, rules, and ever-changing tax code, so you don’t have to.

Contact us today and let us show you how using a qualified CPA is your next best step.

“This article is not intended to give, and should not be relied upon for, legal tax advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of a qualified professional.”