AUDIT – these five simple letters have been known to scare even the savviest of taxpayers.
While getting audited is certainly something nobody wants, it could happen when you least expect it.
Being audited for just about anyone could be considered their worst nightmare — but the process doesn’t always have to mean financial disaster.
If you do discover you are going to be audited, don’t run scared. Consider taking these important steps as suggested by tax professionals and reported by Wisebread.com.
While the first response to getting an audit notice is to panic, don’t. Experts suggest that probably, if you’ve reported your taxes accurately (or at least tried to), the overall situation is likely not as bad as you perceive.
“It can be easy to fly off the handle and make what can be simple requests for information into a pressure-filled, stress-inducing scenario,” says certified financial planner Joel Ohman told Wisebread.com. “This need not happen if you have someone — a CPA, tax attorney, or other trusted professional — representing you and counseling you.”
First, stop, slow down, and breathe; then call whoever does your taxes. Trust them; rely on their expertise and advice.
Read the audit notice carefully
Do take a good, long look at the audit notice you’ve received. Many audits are desk audits or computer document-matching audits rather than the complete tax return audits done in-person, according to Wisebread.com
Prepare the required documents.
Having documentation is the key to success in audits. Be ready to provide organized documents like 1099s, K-1s, W-2s, and canceled checks, and reconcile them to the amounts claimed on the return. If you do not have adequate documentation, it’s more likely that you won’t get the deduction.
When going through your documentation, if you come up with more deductions than you claimed, don’t be afraid to submit them in your response. The IRS can be strict on accepting documentation for charitable donations and business expenses, however,according to Wisebread.com
Submit your documents on time
Don’t escalate matters by missing important deadlines. An audit is a serious matter that can result in heavy fines, and you don’t want to put more stress on the process by being uncooperative. Follow the guidelines and get your documents submitted by the date expected, according to Wisebread.com.
Don’t get mouthy and combative
The IRS can make anybody feel nervous about being audited, and when people are nervous, they tend to say things they don’t mean.
“Remember the IRS’s job is to appropriate your money for government needs, and your job is to justify why you should keep the money yourself,” CFP Brent Dickerson, owner of Trinity Tax Advisory told Wisebread.com. “They are not your friend, and they are not there to help you keep money for yourself; many people in an audit situation fail to remember this fact. They let down their guard and often say things that they don’t even realize can bite them. Therefore, it’s in your best interest to have a representative work on your behalf with the IRS.”
Take your CPA to the in-person audit
Wisebread.com said if the audit is an in-person audit, consider taking your tax professional to represent you at the audit.
A tax professional that has experience with tax audits should be aware of the rules and know when the agent may be searching for. Sometimes, giving a tax professional a power of attorney authority may avoid the taxpayer from having to sit down with the IRS agent, which many taxpayers would like to avoid, the site added.
Make sure your records are well organized and well documented; make it easy for the agent to follow. If they have confidence that you’re presenting good documentation, they will be more likely to accept what is presented to them, according to Wisbread.com.
Don’t be afraid to disagree and negotiate
Wisebread added that sometimes a tax audit is simply a negotiation — you may have to concede to some changes on smaller items to not have big changes on larger items. It just depends on the agent. Some agents nitpick minor items, while other agents go straight for the big issues, the site said.
Hire an enrolled agent if you’re caught
If you’ve dug yourself into a rabbit’s hole and committed criminal acts by submitting fraudulent taxes, you’ll need more than a CPA to help you. An enrolled agent is a tax expert and recognized by the IRS as having unlimited right of representation. They’re your best hope of the least amount of recourse, the site said.
Shell out what you owe ASAP
Wisebread said you will probably want the situation to be over, and the best way to accomplish that is to pay what you owe immediately. If you don’t, you run the risk of added interest and penalties with added late fees.
If you don’t pay the balance in full in the first 21 days of receiving notice of what you owe (for balances less than $100,000), penalties begin accruing. The faster you can get this squared up and put behind you, the better, according to Wisebread.com.
Again, most importantly, don’t panic if you get an audit notice!