If you are selected for an audit you have no choice but to follow through with it. Two things you should strive for in the audit are to minimize the financial impact and to prevent the IRS from investigating beyond the initial items selected for audit. There are times when you may get a refund or owe nothing more after the audit, but chances are you will owe money. It is important to know how to go into an audit understanding how to prevent the IRS from looking at additional information and how to keep the financial impact of the audit to a minimum. Below are some IRS audit tips to make it through the audit and come out with the best outcome possible.
What to Know About Tax Auditors
Before going into your audit you need to keep a few things in mind about the auditor/auditors you will encounter. Auditors have a very tough/stressful job because many people are angry and resent the fact that they are being audited and will take it out on them. Try to keep your cool around the auditor and realize that the auditor is just doing their job and they want the audit to flow smoothly and calmly just like you. Another important thing to keep in mind is that auditors are trained to keep their eye out for things that just don’t seem right, which means anything you say or show them in addition to what was asked for, can be used against you. Being polite and friendly can go a long way, but just be aware that the auditor is examining you and your return.
Advice to Follow During a Tax Audit
- Be as brief as you can: Audits are stressful and when people are nervous, they tend to talk too much. Auditors are trained to listen to everything you say. Saying too much can lead to the auditor looking at other tax years that weren’t covered with the initial audit. When possible, keep your answers to the following: Yes, No, I don’t know, I will have to research that, what exact documents do you need?, what is the reason for that?. Talking too much is a very common mistake and costs people big money during audits.
- Do not lie or make misleading statements: The IRS may ask questions they already know the answers to in order to see how much they can trust you. It is best to be completely honest, but do not ramble and say anything more than is required.
- Don’t offer other years tax information: If you show the auditor other years tax returns and they see something that they don’t agree with, they have the right to make adjustments on that tax year even though it wasn’t covered with the initial audit notice. It is important to only bring in the documents that are stated in the IRS notice in order to limit the scope of the tax audit.
- Have all required support: Going into the audit with all the required documents and having it organized can impress the auditor and make them realize that you are willing to cooperate and make things flow smoothly. If you are missing documents, you are allowed to reconstruct them.The auditor is required to consider the newly created documents if they seem reasonable. Courts have recognized that taxpayers can’t be expect to keep perfect records and sometimes they are willing to accept verbal explanations, but the better your records the smoother your audit will flow.
- Be yourself during an audit: It isn’t only just your tax return under review, you are being reviewed as well by the auditor. The auditor will observe your actions and if something doesn’t seem right it may cause more problems for you. Auditors try to get a sense if you are hiding something, or if your mannerisms are odd when certain items are discussed. Be aware, especially early on in the audit process that the auditor is looking for these types of things, so try to avoid coming off as if you having something to hide.
- Don’t give original documents to an auditor: The IRS is known for losing documents. If the auditor wants a copy of one of your original documents, be sure to make a copy and keep the original yourself. Because the IRS lost one of your documents isn’t an excuse for not having proper support.
- Understand how the IRS feels about substantial compliance: There may be times where you will not be able to come up with all of the required documentation to backup some of your deductions. If you can show the IRS that you have enough proof that you did follow IRS tax laws, but your documentation is lacking, they may allow the deduction to be taken. Files do get lost, few people have perfect records and the IRS does understand this.
- Appeal the audit if you don’t agree: It is your right to appeal an audit examination report. The best way to start is by calling the auditor that you don’t agree with and make your argument. If you are having troubles making your point then you can choose to meet with their manager, appeal with the IRS, or go to tax court.
- Consider hiring a tax professional: A tax professional can represent you before the IRS. A qualified tax professional is well versed in audits and is well aware of IRS tactics. Chances are, a tax professional can help ensure a better outcome of the audit.
Tips for Dealing with a Tough Auditor
Sometimes auditors are tough and they think they can walk all over you. Here are some tips on how to deal with an auditor that is not acting appropriately.
- Delay the audit: Auditors do not like delays because many times their performance is based on cases that they close. If they know you are going to delay them they can possibly lighten up a bit to allow the audit to move forward on a better tone. To delay, you can ask for a recess and pick back up at a later time. If they won’t allow a recess you can then say you want to talk with a tax professional before going any further with the audit. If you talk about wanting a professional, the auditor must legally grant your request (You don’t actually need to get one, but the request will end the audit for the current session).
- Request a New Auditor: If you feel like you are being treated unfairly or the auditor is not being respectful to you, request a new one. In order to request a new auditor you will need to speak with their manager. When speaking with the manager you should tell them that you feel you are not being treated with respect and you would like to work with someone else. Most likely, your request will not be granted, but the fact that you told the manager how you were being treated and that manager likely talked to your auditor, you may see the tone of the audit change.
- Stand up to the auditor: If you are sensing that your auditor thinks that you will just accept whatever they find then it is a good idea to start questioning them. If they start getting the feeling that you will question everything they do and they will need to provide an explanation, they may begin to think twice about certain things. It is fine to ask questions during an audit, just try to do it in a polite manner. Be sure to let them know that it isn’t going to be easy for them to get their way on everything.
- Consider recording the audit: You are allowed to record your audit with the IRS as long as you let them know in writing ten days before. When the auditor knows all proceedings are being recorded, this can limit abuse and can create a more professional environment.
Audits can almost be seen as a game. There are clear strategies to being successful in audits but there are no clear cut formulas to getting through them. If you had two identical tax returns with the same back up information, you can have two significantly different outcomes of the audit depending upon how it is played. Keeping in mind these tips can help ensure a better outcome.
The Tax Cuts and Jobs Act is the most significant set of changes to the U.S. tax code in several decades. The vast majority of the changes go into effect for the 2018 tax year, which is the return that you’ll file with the IRS in the spring of 2019.
Here’s a rundown of what Americans need to know about the recent tax changes that could affect individual taxpayers in the upcoming tax season. Changes made on the corporate side won’t affect your tax return, so we’ll focus on the individual filer. These changes, which are mandated by the new tax legislation for individual filers, are set to expire in 2025, unless they get extended. (Corporate changes made by the bill are permanent.)
Tax brackets — Still seven, but with different rates
One of the headline changes made by the Tax Cuts and Jobs Act was a general lowering of U.S. tax rates. While the number of tax brackets remained at seven, the rates were generally lowered, with the exception of the minimum tax rate staying at 10% for the poorest Americans.
In addition to lower tax rates, the income thresholds were increased, particularly at the higher tax brackets. In other words, the highest tax brackets now apply to fewer (higher-earning) Americans than it did previously. For example, before the passage of the Tax Cuts and Jobs Act, the top tax rate was 39.6% and applied to married couples filing jointly who earned more than $480,050. With tax reform, that top rate was lowered to 37% and only applies to married couples making more than $600,000 in taxable income, much more income than before.
|Former Marginal Tax Rates (2017 and Prior Years)||New Marginal Tax Rates (2018-2025 Tax Years)|
DATA SOURCE: IRS