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Just When You Think It's Over … Hello, IRS!
Namely, what happens if the IRS gets in touch with you for an … audit? If there is anything that can strike terror in the hearts of most taxpayers, it’s an audit. It is important to take an audit notice seriously, but you shouldn’t panic.
The Pennsylvania Institute of Certified Public Accountants answers some questions people frequently ask regarding audits.
• I asked for an extension. As I now prepare my forms: What can I do to avoid being audited? There is nothing you can do to guarantee that you will not be audited. However, you can protect yourself by making sure you have completed the return honestly and by keeping complete and accurate records so you can substantiate every number on your return.
If your return contains any item you think the IRS may question, a letter of explanation may help ward off an audit.
• Is there a time limit as to when the IRS can audit me? Generally, the IRS can audit your return within three years from whichever is later — the date when the return was due or when it was actually filed. If you substantially underreport your income or file no return, there is no statute of limitations regarding when your return can be audited.
• How quickly do I need to respond to an audit notice? You should respond promptly. If you feel you need more time to gather your records and prepare for the audit, you may ask for a postponement.
• Do I need professional help? In most cases, it’s a good idea to enlist the services of a CPA or other tax professional. He or she can help prepare you before the audit, accompanying you to the audit, or attending in your place.
If you decide to go it alone, and then in the midst of an audit you determine that you need the help of a CPA or other tax professional, you have the right to stop the audit and reschedule it for a later date.
• What should I do to prepare for an audit? One of the first things you should do is read “IRS Publication 1, Taxpayer’s Bill of Rights.” This document spells out how the IRS must conduct an audit and explains the rights of a taxpayer whose return is being examined.
Next, review your return thoroughly to refresh your memory, especially if it’s been a couple of years since you filed. The final step is to start collecting all the relevant records and documentation you need to support your income, deductions and credits.
• What is the best way to get through the audit itself? The audit will progress more smoothly if you follow a few ground rules. Be courteous, businesslike and on time. Present your records in an organized manner. Supply only the information and records requested. Volunteering extra information may open up additional areas of inquiry. Ask to speak to the auditor’s supervisor if you think you are being treated unfairly.
• What if I don’t have records or receipts to substantiate my deductions? If you are missing receipts or other documents, you’re allowed to reconstruct your records. This can be time-consuming and expensive, so it’s best to have a system in place for retaining receipts and other documentation to back up your deductions.
• If I owe additional taxes, how quickly will I have to pay? The IRS will expect you to pay quickly, and doing so will avoid additional interest and collection actions. If you can’t pay the full amount, you may be able to arrange a monthly installment agreement. Be aware that interest will accrue during the time you are making monthly payments.
• What if I don’t agree with the outcome of the audit? If you disagree with the IRS’s findings, you have the right to appeal. Your first appeal is to the examiner’s supervisor. Should you disagree with the supervisor’s ruling, your next step is the IRS Appeals Office, which is independent of the local IRS office that conducted the audit.
Beyond that, you can take your case to the United States Tax Court.