Besides filing taxes, the next thing a taxpayer can dread is getting audited. Here are some tips to reduce your chances on being the 'chosen' one and what to do if you find yourself under the bright lights.
Avoid an audit with a computer-processed, thorough, and accurate tax return.
Prepare your tax return by computer for an organized, neat look use TurboTax, TaxCut, IRS Free File Program, or another tax preparation program. The internal checks on these programs can also help avoid calculation errors and often help find deductions too. But be careful of using the preprinted address labels or e-filing, which expedites the processing as well as auditing cycles for the IRS.
Back up large deduction claims, such as for natural disaster, by attaching repair receipts, canceled checks, insurance reports, photos - proof! Also, avoid rounding numbers for deductions, which gives the appearance of estimating amounts.
Be aware of audit magnets! Filing an income tax with Schedule C, Profit or Loss for Business, will catch the eye of auditors. Consider reporting small side-job income as other income on line 22 of your tax return.
If audited, aim to prove your entitlement to the credits, deductions, and exemptions you took.
Don't rush! Postponing the audit by requesting additional time when you need it to organize documents and records can work to your advantage. The IRS must complete an audit within three years of the time the tax return is filed, unless tax fraud or significant underreporting of income is involved.
Be ready. Research tax law as it pertains to your audit. Consider consulting an attorney. Give your accountant a call, and look through the Taxpayers' Bill of Rights so you know what your rights are. Even during the audit, don't shy away from requesting a recess to consult your tax counsel.
Go to them. If possible, go to the IRS office for the audit instead of holding the audit at your business or home.
Consider the stats. Fewer than 25% of taxpayers who are audited avoid paying additional taxes. Know that the odds are against you and consider negotiating with the auditor to limit damages.
This is not the time to volunteer. Avoid giving the auditor more information than what is requested. There is no need to give copies of other years' returns or to hand over documents that don't relate to the audit.
Appeal. When you receive the examination report you can call the auditor with questions and to explain the results. You have the option to appeal within the IRS or go on to tax court.