How to Survive an IRS Audit

First, relax. If you take these five steps, you'll escape unscathed.

How to Survive an IRS Audit

First, relax. If you take these five steps, you'll escape unscathed.

1
Chill out

“There are a lot of different levels of examination,” says New York CPA David Vishnia, and some aren’t so bad. The IRS sends out more than 7 million math-error notices annually and includes a bill for the recalculated tax plus interest. Your best strategy is to pay up. Other letters request substantiation for an item on your return.

2
Provide it

But if you receive an invitation to meet with an agent, “Call your accountant or tax lawyer,” says Vishnia.

3
Remain silent

Do not go to the friendly IRS agent’s office. Send your accountant. You have no expertise in the tax code; the agent knows everything about the tax code. It’s nerve-racking, and you are almost guaranteed to volunteer information the agent may not have been looking for. He doesn’t have to prove you screwed up; you have to prove you didn’t.

4
Pay immediately

Assuming you do owe tax, the biggest costs for the audit are the penalties and taxes that are accruing every day on every cent of the tax and interest, and the fees charged by your accountant or lawyer. “Professional fees alone can cost anywhere from $1,000 for a few hours of work — say, a review of your travel and entertainment expenses — to $12,000 for an examination of all the income and expense records for a relatively complicated personal return,” says CPA Julian J. Miller, of Miller & Company CPAs, in New York City. The penalty can reach 25 percent of the total tax owed. By paying right away, you’ll at least stop the cost from mounting. File an amended state return as soon as you settle up with Uncle Sam, because you’ll owe back tax and penalties to the state as well.

5
Lodge an appeal

A government study found that 41 percent of taxpayers who took their cases to the IRS appeals division won at least a partial reduction.