Occasionally, the IRS may uncover errors in your return, or seek additional information or clarification, known as an audit. Of course, it’s important to be truthful when filing your taxes. It’s just as important to be prepared to substantiate your return with complete records if the IRS contacts you.

An IRS audit is generally an impartial review of your tax return to determine its accuracy. It is not an accusation of wrongdoing. But you, the taxpayer, generally have to provide documentation for the entries on your return. For example, if you gave $300 worth of old clothing to a charity but you don’t have a receipt or other proof that such a gift was made, you might be in trouble if you’re audited. If the IRS questions the deduction and you cannot provide reasonable evidence that a charitable gift, in such amount, was made, the deduction may be disallowed.

Why Me?

All tax filers face a slim chance of being audited. Each year the IRS reviews a random sample of 13,000 returns representing a valid cross section of all returns and examines those returns carefully for compliance. As there are 140 million tax returns filed annually, the odds of your return being picked in a random audit are small. You are much more likely to be audited, however, if you are in one of the following categories of people: 

• People in cash businesses are easy targets for the IRS. Many people in these businesses don’t declare all their income, and the IRS knows it. If, for example, your occupation is listed as a hairdresser, waiter or bartender, it may raise a red flag. If you regularly receive cash for your work, be sure to report all the money you earn, including tips. 
• Professionals such as doctors, lawyers and accountants are also targeted. That’s because they generally run their own businesses and do their own bookkeeping. The IRS may want back up of claimed deductions and expenses.
• The IRS may choose to examine carefully the returns of people taking unusually large deductions and people who are involved in questionable investments or abusive tax shelters. Although such deductions or investments are often justified, they may raise a red flag.

Deductions the IRS Are Likely to Challenge
Tax law mandates that certain deductions must exceed a minimum percentage of your income before you can claim them. For example, medical deductions must exceed 7.5 percent of your income, and casualty loss deductions (e.g., a fire loss) must exceed 10 percent before you can claim them. Only a small number of taxpayers qualify, so if you claim these deductions, keep careful records.

The IRS is also likely to look at your contributions to charity. If you deduct more than the IRS’s statistical norms, you may be audited. You must have a receipt containing certain specific information (not just a canceled check) for any single donation of $250 or more. If you don’t have a receipt, the IRS may disallow the deduction.

A home office deduction may also increase your chances of being audited. Keep accurate records if you deduct expenses related to a home office.

The IRS may also audit if they receive a tip that you are cheating on your tax returns.

The Different Kinds of Audits
If you are notified that you will be audited, take it seriously but don’t panic. First, read the letter from the IRS carefully and figure out what you are being asked to do. It may be as simple as signing your return. There are three basic types of audits, and the letter will explain which one applies to you: 

• A Correspondence Audit is for minor mistakes. A letter from the IRS will tell you what documentation to send through the mail. Once the IRS is satisfied that it has the correct paperwork, the matter will be closed.
• A Field Audit is one in which the auditor comes to your business or home to verify the accuracy of your return. This type of audit is usually done if the return is complicated and involves business operations. If your records are neat and in order, it will suggest to the auditor that you are a conscientious businessperson.
• An Office Audit requires that you physically appear on a specific date and time at an IRS facility and bring your documentation. Bring only the documents asked for. Otherwise, you will leave yourself open to an examination of all your records, even if they are not in dispute. If you are unable to keep a scheduled audit appointment, phone and reschedule as soon as possible.
  

Do I Need Professional Help?
For a field or office audit, professional assistance may be a good idea. Taxation is very complicated and technical, and you will benefit from having an expert on your side. If you had an attorney, CPA, or an enrolled agent prepare your return, you will most likely want to bring that person to the audit. Professional tax preparation services will sometimes send someone to accompany you to an audit. Weigh the amount of tax in question against the cost of bringing a professional with you.

You can either agree or disagree with the auditor’s findings. If you agree, your experience with the IRS is finished upon completion of some paperwork and payment of any outstanding amounts. If you disagree with the auditor, the issues in question can be reviewed informally with the auditor’s supervisor or you can appeal to the IRS appeals office, which is independent of the local IRS office that conducted the audit. If you do not reach an agreement with the appeals officer, you may take your case to the U.S. Tax Court, U.S. Claims Court or U.S. District Court. The Tax Court generally hears cases before any tax is assessed or paid. The Claims Court and District Court generally hear tax cases only after you have paid the tax and filed a claim for refund.

Audit Advice 

• Don’t rush. Respond promptly to a notification of audit, but don’t hesitate to ask for a postponement if you need time to gather records.
• Answer questions truthfully, but don’t volunteer information that isn’t asked for. 
• Be friendly. A positive attitude will go a long way. 
• Keep good records. The burden of proof is initially on you. 
• Keep records for at least three years. 
• Educate yourself. Read IRS Publication 1, Your Rights as a Taxpayer. You can order this and other tax forms and publications by calling the IRS at 1-800-829-3676 or visiting www.irs.gov.
• Ask for help. Consider contacting a tax professional if the audit is extensive or complex. 
• Don’t let the auditor keep your original documents. 
• Appeal the audit if you disagree with the findings. 
• Come clean. If you know one of your deductions is unsupportable, admit it and pay the tax.

Filing and paying taxes is part of life, but it doesn’t have to be an unpleasant experience. The more organized you are and the more you learn about how to file your taxes, the easier it will become. Many happy returns!