If you receive an audit notice from the IRS, it’s important to take the right steps to ensure that the process goes smoothly and to avoid unnecessary stress or penalties. Here’s what you need to do:
1. Read the Audit Notice Carefully
The first step is to carefully read the audit notice. It will contain important information, such as:
- Type of Audit: The IRS may conduct different types of audits, including mail audits, office audits, or field audits. The notice will explain what type of audit you’re facing.
- The Year(s) Under Review: The IRS will specify the tax years they are reviewing. You will need to gather documents related to the specific years being audited.
- Requested Documents: The IRS will tell you what documents and records they need to review. This may include tax returns, receipts, financial statements, bank records, or other relevant documents.
- Response Deadline: The notice will indicate a deadline by which you must respond. Be sure to keep track of this date to avoid penalties for non-compliance.
2. Stay Calm and Organized
While it can be stressful, it’s important to stay calm. The IRS is simply conducting an audit to ensure that your tax returns are accurate and in compliance with the law. Take these steps to stay organized:
- Review Your Records: Gather all necessary documentation for the years being audited. This includes your tax returns, bank statements, receipts, invoices, and any other records that support the income, deductions, and credits you reported.
- Keep a Copy of the Notice: Keep a copy of the audit notice and any correspondence you have with the IRS for your records.
- Make a Timeline: Create a timeline for when you need to respond, what documents you need, and when you’ll have them ready. This will help you stay on track and avoid missing any deadlines.
3. Consult a Tax Professional
If you’re unsure about the audit process or if you’re facing a complex audit, it’s a good idea to consult with a tax professional. A Certified Public Accountant (CPA), tax attorney, or an Enrolled Agent (EA) can help you navigate the audit process.
- Why Consult a Professional?: A tax professional can provide valuable guidance on the IRS’s requests, help you gather the necessary documents, and represent you in communications with the IRS. If the audit is complicated, or if you disagree with the IRS’s findings, a tax professional can also help you dispute the audit results.
4. Gather and Submit the Requested Documents
Once you have identified the documents needed, gather them and organize them in a manner that’s easy to review. The IRS may request various records, such as:
- Proof of Income: W-2s, 1099s, bank statements, etc.
- Deductions: Receipts for business expenses, charitable donations, mortgage interest payments, medical expenses, etc.
- Tax Credits: Documentation supporting tax credits claimed, such as education credits or earned income tax credits.
- Business Records: If you own a business, provide supporting documents like profit and loss statements, invoices, and other financial records.
Make sure the documents you provide are accurate and complete. If you can’t find a document, you may want to contact the IRS and explain your situation. Don’t try to provide fake or altered documents, as that could lead to more severe penalties.
5. Respond Within the Deadline
Pay attention to the deadline provided in the audit notice. The IRS will typically allow you a specific amount of time to respond and submit the required documents. Failing to meet the deadline can result in penalties or the IRS making assumptions about your tax return that could work against you.
- Request an Extension: If you need more time to gather documents, you can request an extension from the IRS. You’ll need to do this before the original deadline expires.
6. Be Honest and Transparent
During the audit, it’s important to be honest and transparent with the IRS. If you made a mistake on your tax return, acknowledge it. If you don’t have the requested records, explain why and try to provide other supporting documentation.
- Mistakes: If the audit reveals that you made a mistake on your taxes, it’s better to cooperate and correct the error than to fight against the IRS without providing adequate documentation. The IRS may be able to adjust your return and avoid further penalties.
7. Consider Your Options if You Disagree with the Audit Findings
Once the IRS has completed the audit, they will send you a Notice of Results of Audit (also called a "Revenue Agent's Report" or "Report of Audit"). If you agree with the findings, you can sign and return the document, and the IRS will process the changes.
However, if you disagree with the results, you have the following options:
- Request an Appeal: If you believe the audit findings are incorrect, you can request an appeal. The IRS has an independent office that handles appeals.
- File a Protest: If your case is significant, you may file a formal protest to dispute the findings.
- Tax Court: If you still disagree with the findings after an appeal, you can take your case to Tax Court. It’s highly advisable to consult with a tax attorney before proceeding to Tax Court.
8. Pay Any Outstanding Taxes or Set Up a Payment Plan
If the audit results in additional taxes owed, you will need to pay the amount due. If you cannot pay the full amount at once, the IRS may allow you to set up a payment plan or offer options like Offer in Compromise (if you qualify).
- Installment Agreements: The IRS offers installment agreements for taxpayers who cannot pay their full tax liability upfront. You can apply for this online or by submitting IRS Form 9465.
- Offer in Compromise (OIC): In certain cases, the IRS may agree to settle for less than the full amount owed. This is a difficult process to qualify for and usually requires the help of a tax professional.
9. Keep Records of the Audit and Its Outcome
Once the audit is complete, make sure you keep a copy of all communications, notices, and the final audit report for your records. This will be helpful if you need to reference the audit in the future or if you are ever audited again.
10. Be Prepared for Future Audits
To avoid future audits, make sure your tax filings are accurate and well-documented. Work with a tax professional to ensure your returns are compliant with tax laws, and keep thorough records of all receipts, bank statements, and relevant documents in case of future audits.
