HOW TO PREPARE FOR AN IRS AUDIT

Chances are you’ve heard nightmare stories about a friend-of-a-friend who had to go through an IRS audit. Unfortunately, these scary scenarios almost always end in financial calamity.

The first thing to remember is the IRS conducts individual tax audits on less than 1% of all filers in an average year. So your chances of going through one are pretty slim.

But, if you do get selected, there’s no need to panic. The key to getting through an IRS audit is preparation. Just follow the steps laid out here to make sure you’ll be ready if the time comes.

 How to prepare

The best way to prepare for an IRS audit is to act as though one could happen at any time. So save all your essential tax documentation for three years.  For help, see this list of documents they might request.

Three years is as far back as an auditor will go. However, bear in mind the IRS has the right to go back further if they find substantial errors.

If you are informed about an audit, respond quickly. You only have 30 days to do so, and if you wind up owing money, the interest is building.

Next, get in contact with the IRS to understand the problem. Sometimes there is none. You may have simply been randomly selected.

If this is not the case, you may want to get representation and help from a tax professional before the audit begins.

Finally, know your rights. (Yes, you have some.)

The auditor must treat you professionally and courteously. Of course, your privacy about the tax matters is protected, but you have the right to know why the IRS is asking for information and how they will use it.

You also have the right to know what will happen if the requested audit information is not provided.

As mentioned earlier, you have the right to representation, or you may represent yourself. Also, you have the right to appeal disagreements.

After the audit

 There are only three possible outcomes of an IRS audit. Either your tax return remains unchanged, it brings changes you agree to, or it brings changes you appeal.

You’ll get an audit report that explains any changes, including if you owe back taxes. The document requests a signature, but don’t sign it if you plan to appeal. Doing so waives your right to go to Tax Court.

If you do appeal, you can request assistance from the Taxpayer Advocate Service.

However, if you owe back taxes and don’t appeal, there are still options. You can request an extension if you can pay in full within 120 days.  If not, you can apply for a monthly payment plan agreement.  Or you can try to settle for less than the tax debt if able to meet the requirements for financial hardship.

 The sun will come up tomorrow

Little Orphan Annie was right. Chances are, the sun will rise the day after you get notified of an IRS audit. If you stay prepared, it will shine even brighter!

Whatever you do, don’t panic. Just follow these steps and get some help if needed.