- So you are in the less than 1% who are facing an IRS audit.
- Take a deep breath.
- This too shall pass and you will get through it.
- It doesn’t have to be the end of the world.
If you only take one piece of advice from this, in my humble opinion this is the most important one. Do not go into an audit alone. You already drew the short straw in the luck department, so do not push it at this point. Hire someone you trust you understands your situation and who can be the middle man between you and the auditor. For one thing, it can be a really negative vibe for a lot of people to deal with an IRS audit day in and day out. Hiring a professional puts you in the position of being on a “need to know” basis, as opposed to you being the one who opens every email, letter or voicemail.
Many audits are “correspondence audits.” In many situations, your audit may not be the type of audit you envisioned. Instead of meetings and in person audits, the IRS routinely performs what are known as “correspondence audits.” These audits typically request verification documentation by mail within a certain time period. Whatever you do, take these requests for verification documentation seriously and answer them in a timely manner (preferably with the assistance of the tax attorney or CPA mentioned in number 1).
If you are dealing with an auditor directly, answer the questions you are asked and do not expand beyond those particular questions. You don’t want to bring up other areas of your return that may not already be under scrutiny as that could lengthen the process and potentially make a less than ideal situation worse.
In the event you find that an item on your return cannot be fully substantiated or the treatment of the item is in question, you should consider alternative means of verification. The IRS regulations provide for a substantial compliance rule in the event a taxpayer cannot fully substantiate travel, entertainment and gift expenditures. Forms of alternative means of verification may include:
- Oral testimony or affidavit signed under penalty of perjury;
- Affidavits signed under penalty of perjury by third parties who can confirm the transaction;
- Reasonable estimates to provide missing elements of a deduction; or
- Logs, descriptive memos, etc. made at or around the time of the transaction.
Again, being honest is above all of utmost importance. If you find that you made a mistake, then take responsibility for the mistake and pay the additional balance owed as soon as possible. Never risk getting into potential criminal trouble with the IRS by being intentionally dishonest in any way.