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How to prepare for an audit

Your life is moving along just fine when one day you get the letter that you hoped and prayed would never come. I'm not talking about the Publishers Clearinghouse Sweepstakes mailer alerting you that you may be a winner. I'm referring to the letter telling you that you've been selected for an IRS audit.

An audit is a review of your tax return to determine whether it is accurate. Though an IRS audit may seem about as much fun as a visit to the proctologist, the actual event doesn't have to be as painful as you think. The better prepared you are beforehand, the better your chances are of surviving the review without having to pay any additional taxes.

Attracting IRS suspicion

There probably isn't any truth to my theory that taxpayers can't see an audit coming because, like vampires, IRS agents don't cast a reflection in the mirror. However, you can estimate your odds of getting audited because the IRS usually goes after certain types of people. These unlucky few are those who get paid in cash, professionals who run their own businesses and individuals who claim unusually large deductions, experts agree.

The government targets these groups because they know that workers such as waiters regularly underestimate their earnings and that doctors and others who run their own businesses are capable of "creative" bookkeeping. Of course, the IRS can also audit you if they've received a tip that you're cheating on your taxes. Calling the IRS is a great practical joke to play on your boss, but you may not want to 'fess up to it afterward.

Tax experts also say that the higher your income is the better your chances are of getting your return examined. But still, you may find some comfort in knowing that only 1 percent of all those persons filing returns actually gets audited.

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Types of audits

Even if you belong in the high-risk category of taxpayers, you can still hope that your audit won't involve a meeting with an IRS agent. There are three kinds of audits and the agency will write to you to explain which one applies in your case:

  • A correspondence audit deals with small mistakes and can be resolved by just simply mailing the IRS the necessary paperwork.

  • A field audit is for more complicated business returns and involves a visit from the auditor to your business or home.

  • An office audit means that you, or your representative, must personally go to the IRS office. This type of audit usually takes place in a dark, smoky room where taxpayers get a bright light shined in their faces while IRS agents take turns roughing them up. Oops! I think I got an IRS investigation mixed up with an FBI interrogation.

Perhaps you're thinking that last year's legislative reform will provide you with more protection from the IRS during an audit. Not quite. The burden of proof remains on the taxpayer to demonstrate that their deductions are merited, according to Fred Daily, a tax attorney in San Francisco and author of Stand Up to the IRS.

"The burden of proof is on the IRS only under certain circumstances and only when the case is in court," says Daily. "Nothing has changed to affect the ordinary audit."

Audit tip

In any case, a meeting with the IRS can be very stressful, so some tax professionals advise their clients not to attend them at all. Instead, you can have a pro represent you at the audit by signing Power of Attorney Form 2848 authorizing an individual to act for you in tax matters.

"It is very important that you stay emotionally unattached during an audit," says Jim Jenkins of Jenkins & Company, a tax research service in Southfield, Mich. "We tend to get emotionally attached to our money. People get incredibly upset by the idea that they'll lose their money and then they blurt things out that they shouldn't be saying. Accountants deal with IRS agents all the time so we're used to it."

Jenkins also warns that complicated tax laws make it easy for agents to ask questions aimed at tripping you up. However, if you are set on handling the matter yourself, then there are some tips that you should keep in mind, courtesy of the Mendlowitz Weitzen accounting firm in New York City:

  • Office Audits: Try to resolve the issue by mail. Write to the IRS to tell them that you can't attend in person but that you're sending them the proper documentation. Send the letter at least three weeks in advance of your appointment and include a phone number where you can be reached. If your papers are in order, then chances are that they'll notify you that the matter has been resolved.

  • Office Audits: Limit your exposure. Take only the information that the IRS asked to see to the audit. Be careful of volunteering information because that might encourage the IRS agent to go probing into other parts of your return.

  • Field Audits: Avoid having the audit at your home or business. You don't want the agent at your home because then he/she might start forming opinions about your standard of living. Have it at your accountant's office instead. The same goes for business audits. Insist that the meeting be held at the IRS office instead.

Garlic won't keep IRS agents away

The best way to make sure that your audit goes smoothly is by keeping good records. Daily suggests that self-employed taxpayers are the ones who most commonly fall victim to faulty bookkeeping.

"The No. 1 cause for adjustments [tax penalties] as a result of an audit is poor record keeping," he says. "That is the Achilles heel of the small business person ... You usually get audited two to three years after you've filed a return and by then records have been lost and people's memory of events isn't as good."

Daily claims that self-employed taxpayers can avoid that problem by using a small business financial computer program such as Quicken. Using Quicken won't make you audit-proof but there are certain steps that you can take to help you lower the chances that you'll get picked for one.

  • Neatness counts: "A neat return can get you past the first line of defense -- IRS screeners who are looking at returns," explains Jenkins. "A laser-printed return looks correct no matter how wrong they may be. If you turn in a return with a lot of erasure marks and is sloppily done, it just doesn't look correct."

  • Fool the computer: "There is a way to trick the IRS computer if you have an expenditure that's out of line," says Jenkins. "Say that you own a company with sales revenues of $100,000 and entertainment expenses of $20,000 and you need to fill out a Schedule C form. That is a high number for a guy doing $100,000 worth of business ... Instead of using the line that they give you to write that number ($20,000), use the 'miscellaneous' line. The computer cannot match the line when it checks your return."

  • Tell the truth: They can't bust you if you haven't done anything wrong. You know how the saying goes: "If all else fails ..."

-- Posted: Feb. 6, 1999


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