So you’re one of the roughly 1.2 million Americans who get slammed with an IRS audit each year. Thankfully, though downright terrifying, the process isn’t as toothed as it may seem. As you’re getting all of your ducks in a row, follow these CPA-approved tips to a tee. You’ll make it through to the other side without the slightest dent to your financial stature. And if you’re in a position to just dodge the process altogether, check out the 5 Best Ways to Avoid Getting Audited by the IRS.
“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. And remember the 20 Mistakes That Will Only Compound Your Stress.
Enlist expert help
But if you receive an invitation to meet with an agent, “Call your accountant or tax lawyer,” says Vishnia.
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. And while your accountant is having the meeting, be sure to read up on 52 Ways to Be Smarter with Money in 2018.
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. For more money advice, check out How to Cut $10,000 From Your Annual Expenses.
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. For more on taxes, check out The One Last-Minute Tax Move You Need to Know.
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