Oh, noooo! I am audited by the IRS!
IRS audits (officially called examinations) is a popular horror-story topic. While it’s true that they are far from pleasant experiences, there’s no reason to lose your sleep – even if you are targeted. It’s likely going to cost you some money, time, and nerves, but it’s not a life-threatening situation. In fact, some people end up receiving money after an audit. The key is to be prepared and know the rules of the game.
#1 – Audits are usually limited to certain issues and a certain tax year
If they’re probing into your moving expenses in 2010, chances are that you won’t be asked about your investments or your 2009 income. Focus your preparation efforts on the specific areas they’re interested in. Don’t show them anything not specifically related to the items and year under audit, even if they ask. They can ask, but cannot force you to submit the materials. At worst, they would take the position least favorable to you. Still, it can be better than giving them documents that would lead to further questioning – especially if you have something to hide. On the other hand, not cooperating can be a risky tactic, from a practical point of view.
#2 – The burden of proof is on you
Unlike criminal system, where they have to convince the jury that you’re a bad guy, in an IRS audit you have to prove that you’re clean. They may or may not agree with you. If they don’t, you can either accept their conclusions or initiate an appeal process.
#3 – Documentation, documentation, and documentation
Audits are not such a big deal for organized people who keep the receipts and maintain regular accurate records. Well, not many of us do. For the rest of us, the only winning move is to gather as much written evidence as possible. Cancelled checks, bank statements, copies of bills, testimonies of other people, photographs – all can and should be used. Warning: provide the IRS with copies and keep all the originals, otherwise you risk losing your documents forever.
#4 – Knowledge of tax law is not required but is helpful
Most IRS audits are about documentary evidence to support the numbers on your return and not about interpretation of the law. Besides, usually IRS agents are skilled bureaucrats but not top experts in tax law. You may, in fact, know more than they do, so don’t be intimidated. They’re frequently wrong. Often, the most aggressive agents are the least knowledgeable.
#5 – Treat them nicely
No matter how unreasonable or harsh they are, getting emotional with the IRS people is hardly ever to your advantage. They’re used to it and are likely to respond in kind, by making it even harder on you. Nobody likes to be abused. Remember – you catch more flies with honey than with vinegar. Some people claim that “PITA” (pain in the …) tactics work well, but I personally wouldn’t use them. Warning: don’t go too far – offering any kind of favors to your auditor may trigger an instant criminal investigation.
#6 – Never lie
Take this advice seriously. You give your answers under penalty of perjury. Lying to an auditor is a crime and technically can be prosecuted if discovered. Not answering a question is not a crime and, in fact, is protected by the Bill of Rights. Politicians and celebrities are skilled at playing this game. The best response to a question that you don’t want to answer is that you’re not prepared and need to check your records or speak with your accountant. If you appear cooperative and sincere, your chances of winning the game are greatly improved.
#7 – Do not volunteer information
Don’t answer questions that are not asked. Just do not. Thousands of people got themselves into unnecessary trouble by foolishly mentioning facts that were not solicited by IRS auditors and would’ve never surfaced otherwise. Tax attorney Frederick W. Daily, in his excellent book Stand Up to the IRS by Nolo Press, suggests five best responses to a question posed by an auditor:
- I don’t recall.
- I’ll have to check on that.
- What specific items do you want to see?
as well as couple real bad ones:
- I guess you caught me, ha, ha!
- I didn’t think you would find that account.
By the way, the latter immediately invites criminal investigation.
#8 – Do not argue with the auditor too hard
Make your point and substantiate it. If the IRS agent wouldn’t agree, move on. Avoid deadlocks. Remember: you can always take the issue to several layers of supervisors, appeal the audit, and/or enlist help of a tax professional.
#9 – Time generally works to your benefit
IRS auditors are frequently overworked and have deadlines. The longer it takes, the more pressure there is on the auditor to close your case. They do forget to follow up on the documents they requested, questions they raised, and problem areas they noticed. If you are real lucky, they may even quietly drop your case altogether, but don’t count on this. Artificially delaying your audit may sometimes work to your advantage, but don’t overdo it.
#10 – Keep perspective
In most cases, the very worst outcome of an IRS audit is to owe money to the government. Even if the amount seems impossibly large, there are ways to deal with the IRS debt. Unlike your landlord or mortgage company who can easily put you on the street for not paying, the IRS has limitations on what they can collect. They recognize the reality of financial hardship, at least to some degree. Owing money to the IRS is no fun, but it is manageable. Some other troubles in life are much worse.