Bankrate's 2009 Tax Guide
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Tempting the tax auditor

Electronic anti-audit assistance

Electronic options can also help. If you're preparing your return yourself, most tax software programs point out some obvious audit issues. The programs have improved over the years to ask more, as well as more personal, questions so that you don't make mistakes that prompt immediate IRS questions. Some even give you a side-by-side comparison of the national deduction averages, says Einbinder.

Other software manufacturers tout audit defense help if worse comes to worst. Remember, though, says Einbinder, that in that case, you'll have to relay your tax information to a person and explain why you claimed an item in the first place. If you're concerned that some claims you plan to make might prompt IRS questions, consider taking them to a tax professional at the beginning of the process. It's generally preferable to answer or prepare for potential inquiries when you file, rather than defend your filing choices months or even years later.

E-filing helps too, in that the software that transmits returns looks for a lot of little errors, says Einbinder. It makes sure you've entered Social Security numbers where necessary and queries you about birth dates that are critical to some tax claims, such as child-related credits and contributions to retirement accounts.

Three types of audits

If your return is selected for a closer look, don't panic and don't ignore IRS inquiries. But even tax professionals admit that's easier said than done. "If I get a letter about one my clients," says Einbinder, "I still get that panicky feeling and I'm a professional."

Once you get past those initial inquiry butterflies, determine exactly what the IRS wants and how much time it will take to give them the answers.

If you're in the audit majority, you'll fall into the least-intrusive category, the correspondence audit. This is the easiest process for both the taxpayer and the IRS. In this case, the IRS sends the taxpayer a letter asking for more information about one or two relatively simple items.

"Just because you get a correspondence-audit letter, there's no need to panic," says Nath. "In fact, if you get a letter instead of a call, that indicates the IRS views the inquiry as not particularly earth-shattering."

After you provide the requested information, the case is usually closed. If not, you'll get another letter describing the additional taxes to be paid. In these cases, says Einbinder, the IRS is not necessarily putting your return under a lot of scrutiny. "They just want questions answered -- some clarity," she says.

If questions about your tax return are more serious, you'll be asked to meet with an examiner at an IRS district office near your home. These agents generally have more training and experience with complex returns. Bring only the documentation needed to answer specific IRS questions, but don't bring or volunteer other data unless you want to open up those records to examination, too.

Finally, there's the field audit. This investigation is done at the taxpayer's home or business and is more wide-ranging. Wealthy taxpayers and businesses are generally the target of a field audit, which gives agents a chance to conduct a "lifestyle" audit.

Here, an IRS agent gets an up-close-and-personal look at a taxpayer's house, neighborhood, car and everything else on hand to see if it meshes with the return's stated income. If a taxpayer has a new Jaguar parked in the garage of a six-bedroom house and reports income of $40,000 a year, he will likely have some explaining to do.

When you get a notice of any type of audit, respond immediately. After you've acknowledged the audit notification, you usually can get a postponement if you need time to gather records. And it's never too late -- even after the audit begins -- to get professional help, such as a tax attorney, certified public accountant or enrolled agent.

Regardless of what kind of audit you might face, the key is to be prepared. Remember, an IRS inquiry does not restrict your ability to ask your own questions and make sure the examination is conducted appropriately.

"You have rights to contest audits," Nath says, "at every level of the process."


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