(Second in a three-part series)
The first piece of our audit series explained how you can breeze through an IRS "correspondence audit" conducted through the mail. But the stakes are considerably higher—as is the stress level—if you're tapped for an IRS "office audit."
As the name implies, the IRS summons you to a local agency office for your office audit. An IRS contact letter that asks you to appear at a specific time spells out the issues on your return that are being examined and any records you'll need to produce.
First step: Request an extension for more time to put your house in order. The IRS will approve any reasonable excuse, such as a pressing business engagement or additional time for compiling records.
The first extension is practically automatic and a second extension will be granted if you have a plausible excuse. But avoid a third suspension request; it'll only raise suspicions that you have something to hide.
If the IRS audits your individual return, the auditor probably won't be familiar with the details until the audit actually begins. At the outset, he or she will likely take a few minutes to become acquainted with your return.
Business returns are a different story. Long before you've arrived, the auditor has at least:
• Examined all the documents in your file. That may include a report containing data on wages, interest and other forms of income received.
• Accessed the results of prior audits. If you've been audited before, your IRS auditor knows it, so be sure to fess up right away. The auditor already knows the answer and is just trying to gauge how honest you are.
• Reviewed your return for any unusual items that could be ripe for a conflict. Dealing with IRS auditors: 8 rules
On audit day, make sure you arrive on time. If you're bringing your tax adviser along, make sure he or she is on time, too (see box, page 3). Hand your appointment letter to the clerk and take a seat. When you're called in for your meeting, follow these eight rules:
1. Be businesslike. Your documentation will carry the day, but your attitude sets the tone. Auditors are often influenced by first impressions.
2. Prepare to take notes or record the session. Bring a pen and a legal pad. The auditor may provide a list of items you will need to complete the examination. If you want to make a sound recording, you must give the IRS at least 10 days' notice.
3. Make sure you have all of the proof. Auditors typically rely on your documentation to prove or disprove your points. But remember: It's perfectly legal to supply evidence other than receipts to support a deduction, including signed statements from the parties involved. If more information is needed, the IRS will grant you time to obtain it.
4. Present documentation one piece at a time. Provide only what you've been asked for. Once the auditor looks it over, take it back. Don't give the auditor an opportunity to reflect upon it. If the document is needed again, the auditor will have to ask.
5. Be believable. Show the receipts required to prove your point. If you're asked about an item for which you don't have a receipt, tell the auditor you will have to reconstruct the records. The auditor has authority to make reasonable allowances, but you'll earn the benefit of the doubt only if you're credible.
6. Stay cool under fire. If you don't understand why the auditor is asking a certain question, it's well within your rights to ask. If the auditor grows confrontational, be respectful but stick to your guns. Tell the auditor you did not anticipate that question, you're not sure of the answer and you'll need more time to respond adequately.
7. Don't volunteer any extra information. It could raise more questions and cause the auditor to venture off in new directions that are fraught with peril for you. Answer only the questions you've been asked: nothing more, nothing less.
Be especially wary if the auditor asks a question about an issue that wasn't raised in the original contact letter. An off-the-cuff answer could unnecessarily damage your position.
Instead, tell the auditor that you need more time to study your records because the letter didn't address the issue. That will enable you to provide a carefully measured answer. Or, it's possible
the auditor won't broach the subject again and it will simply go away by itself.
8. Request a new auditor if things turn ugly. If you run into a belligerent auditor, you can ask for the name and telephone number of his or her immediate supervisor. The situation may call for a different auditor if a personality conflict exists.
But ask for a change of auditors strictly as a last resort. Once you've been labeled in IRS circles as a "problem" taxpayer, it's difficult to get a fair shake.
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