Tame Your Taxes – The IRS is Auditing You, Now What?

By the time you read this article there will be less than two weeks left before 2021 arrives. Since I gave you yearend tax reduction advice last month, I have a new topic to cover. What should you do if you are being audited by the IRS? My years of experience in tax resolution and membership in the ASTPS will help guide you through an IRS audit.

You are sorting through today’s stack of mail, then you see it. It is a letter from the Internal Revenue Service addressed to you. You remember receiving your refund months ago via direct deposit, so you know it isn’t a refund check. Your heart stops, you gasp for breath, your palms sweat, you are tempted to throw it in the trash with the other junk mail. But you resist that urge because you are a responsible citizen. Sure enough, your nightmare is real, you are being audited! You drop the letter. You find the closest chair and take a seat. You call your spouse and tell them the bad news. Perhaps you both start to cry. You feel a range of emotions. Certainly, there must be some mistake. You are a good person. You file and pay your taxes every year. Then you suspect your accountant must have made a mistake. Maybe he transposed a number from your W-2 or brokerage statement. There must be an explanation.

Unfortunately, the IRS has no idea of the needless emotional trauma they cause people because of the numerous computer-generated tax assessments generated every year. Or do they? In my experience, most of these letters are wrong. The taxpayers don’t owe the tax assessed. One division of the IRS didn’t wait for another division to do its job, so the IRS notice is sent. No one cares enough to check the numbers generated by the computer. Saving mental anguish of millions of taxpayers isn’t in the budget. Besides, the IRS gets a bulk mail discount, and somebody might just send them a check.

If you ever get a notice from the IRS:

1. Don’t ignore it.
2. Read it.
3. If you don’t understand it, contact your tax preparer. In fact, always send them a copy. They can explain it to you.
4. Most likely, the letter is a Correspondence Audit, meaning they just want proof of one or two items. For example, their computer says that your charitable contributions are much higher than the national average so they might request copies of your receipts from the charities. Answering this Correspondence Audit would be inconvenient, but not a nightmare. Just go back to your tax receipts from that year, make copies and mail them to the IRS via Priority Mail so you have a tracking number and proof they received it. DO NOT send them your original receipts.
5. If you are being audited, your tax preparer should explain the process. They should also be willing (for a fee) to represent you in the audit. If the return was self-prepared, seek help (see below).
6. Don’t give up.
7. Stay positive. This trail will end, you will get through it.

If you have been selected for an audit of your entire 1040, you have my sympathies. The notice should state specifically which year is being audited. If you are lucky, only one tax year is listed. (The IRS can audit the most recent three tax years. If you haven’t filed tax returns, they can audit the most recent 10 years.) Warning, even if only one year is listed, the IRS auditor has the prerogative to add a year or two. Therefore, treat the auditor with courtesy and respect. They are humans too. Treat them poorly, and they may request receipts for every penny you deducted.

Get professional help. Engage a tax attorney, Enrolled Agent, or Certified Public Accountant to help you. They might be willing to help you prepare for an audit, but most of the time they will insist you sign a POA (Power of Attorney, Form 2848) to represent you. (You are too emotionally attached to the situation to represent your own best interests. Everything they question will appear like they are calling you a lying, cheating scoundrel. Too often, when taxpayers talk directly to IRS agents, they remember how good they felt at their first Catholic confessional after having told the priest all their sins. Unfortunately, IRS agents are not ordained representatives of God and your penitence will cost you dearly.)

Conversely, if you are confident that you are audit-proof and have tenaciously prepared for a potential IRS audit, you could consider responding directly to the audit notice. Be willing to mail them copies of all your receipts and worksheets that support every deduction and every entry on the tax return. Typically, this is only 1% of taxpayers.

During the IRS audit process, you may experience the following:

1. Feel like you are on trial.
2. Being interrogated.
3. Treated like a criminal.
4. Angry at the waste of your time.
5. Anxious at the cost of defending yourself, even if the result is No Change.
6. Exasperated at the inefficiency of the audit process.
7. Intimidated by the seemingly limitless resources the IRS has to bring against you.
8. Fear that you will go to prison.
9. Dred that other people will hear that you are being audited and think you did something wrong.
10. Willingness to pay whatever tax and penalties they say you owe, just to make the emotional pain stop and try to get your life back.

I have much more to share, so this will be Part 1.

Aric Schreiner, CPA, PFS, Certified Tax Strategist, helps successful professionals and small business owners strategize to reduce taxes and audit risk.