Opening your mail box and finding an IRS audit letter is very stressful. The IRS hopes you discuss your stress with as many friends as possible because your concerns keep other taxpayers truthful.
Most of your audit defense work occurs when preparing the return. Check thoroughly that you have the records to support each deduction and credit. Clear, legible notes are important if you make a calculation to arrive at a line item on your return. On the dreadful day the IRS audit letter arrives, your first action should be to make an appointment with a tax professional.
You may not wish to go to the IRS office yourself and certain tax professionals are permitted to represent you before the IRS. This way you will not have to miss work and the audit experience will be less stressful. As with many professions, tax experts use a jargon that is difficult to understand. This is a clear advantage when dealing with your auditor. A tax professional can match the IRS questions with your documents more quickly than you can, and he will generally finish your audit faster and with a better conclusion.
After opening the letter, your next question might be, “Why did they select me for audit?” Your return may have been selected randomly, but it is more probable you flunked your “DIF” test. The Discriminate Function System (DIF) compares your credits, deductions, earnings, and exemptions with mathematical standards established by the IRS.
Claiming that you owe no tax because the tax laws are unconstitutional or the dollar is worthless will probably incur an audit. Tax protests are carefully checked. Headlines throughout the country would proclaim any legal way not to pay your tax.
High income and large itemized deductions will interest the DIF computer system. Targeting returns with these conditions often produce a better chance of getting more tax. Good records and legible notes during tax preparation will go a long way in proving itemized deductions.
Your occupation and certain deductions will make your return more likely to be audited. Taxi drivers, waiters, and similar jobs which deal with cash income have a higher chance of selection. Independent contractors and self-employed people are often chosen for audit because of potential under-reported cash. Travel, entertainment, employee business expenses, and home office deductions are often targeted as taxpayers may have simply guessed or kept poor records.
Self-prepared, complex tax returns sometimes invite IRS review. Nearly 50% of all tax returns filed in 1999 were filled out by a paid tax preparer. A tax professional will assist you in making sure that your records are complete and he can quickly explain to an auditor how your return was put together.
You might wish to take this simple test. Examine your return from 3 years ago and see if you can produce records to back up each line of the return. Generally, returns are picked to be checked during the two years following the filing date. The IRS has three years from the due date to audit returns unless there is a suggestion of under reported income or fraud.