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Surviving an Audit

May 2, 2011

John Jastremski Presents:

 

Surviving an Audit

Even the most honest of taxpayers can be left trembling at the thought of an IRS audit. Let’s face it–it’s right up there with public speaking. To survive an audit, you’ve got to arm yourself with information. You should understand what the audit process is all about, why your return was audited, what your rights and responsibilities are, and how you can appeal the findings.
An audit is not an accusation of wrongdoing

An IRS audit is an impartial review of your tax return to determine its accuracy–it’s not an accusation of wrongdoing. However, you must demonstrate to the IRS that you reported all of your income and were entitled to any credits, deductions, and exemptions in question.

The IRS must complete an audit within three years of the time the tax return is filed, unless tax fraud or a substantial underreporting of income is involved.
Certain returns run a greater risk of audit

Several factors can lead the IRS to single out your return for an audit. For instance, taxpayers who are self-employed, receive much of their income in tips, or run cash-intensive businesses face a greater likelihood of audits. The IRS also pays more attention to professionals such as doctors, lawyers, and accountants (who often run their own businesses and do their own bookkeeping). In addition, if your itemized deductions in several major categories–medical and dental expenses, taxes, charitable contributions, and miscellaneous–are greater than average, you’ll have an increased chance of being audited. Other red flags may include:

  • return that is missing required schedules
  • return that is missing a required alternative minimum tax form
  • return signed by a preparer associated with problems in the past
  • return reporting income of at least $150,000

There are three types of audits

If you are to be audited, the IRS will inform you by letter. There are three types of audits:

  • A correspondence audit: This is for minor mistakes and requires only that you mail certain information to the IRS. For example, maybe you forgot to attach a Schedule C to your income tax return. The matter will be closed if the IRS is satisfied with your paperwork.
  • An office audit: Here, you’d typically bring your tax-related records to an IRS office for examination. For example, if you claimed an unusually high deduction for medical expenses, the IRS may want to see your medical bills and canceled checks, among other things.
  • A field audit: Here, the auditor generally visits your home or business to verify the accuracy of your tax return. It may be possible for the auditor to visit the office of your representative, instead.

Know your rights regarding the audit

You have several rights when you’re involved in an audit. These include:

  • The right to an explanation of the audit process
  • The right to representation by an attorney, CPA, or enrolled agent
  • The right to claim additional deductions that you didn’t originally claim on your tax return
  • The right to request an opinion from the IRS’s national office on specific technical issues that arise during the audit

Audit survival tips

Consider the following when you are audited:

  • Request a postponement (whenever you need it) to gather your records and put them in order
  • Be sure to read IRS Publication 1 (Taxpayers’ Bill of Rights) before your audit
  • Before your initial interview with the IRS agent, meet with your representative (if any) to discuss strategies and expected results
  • Bring to the audit only the documents that are requested in the IRS notice
  • Be thoroughly prepared–if your records clearly substantiate the items claimed on yourreturn, the agent won’t waste time conducting a more in-depth audit
  • Be professional and courteous (and expect the same treatment in return)
  • Do not volunteer information to the IRS agent; if you have a representative, he or she should respond to the agent’s questions
  • Don’t lie
  • Keep detailed records of any materials that you submit to the agent and of any questions asked by the agent
  • Ask to speak to the auditor’s supervisor if you think that the agent is treating you unfairly
  • When you get the examination report, call the auditor if you don’t understand or agree with it
  • If you don’t agree about the tax liability, meet to see if a compromise can be reached

You can appeal if you disagree with the audit result

You can either agree or disagree with the auditor’s findings. If you agree, you’ll complete some paperwork and pay what’s owed. 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 office that conducted the audit. You can appeal the auditor’s findings by sending a protest letter to the IRS within 30 days of receiving the audit report. If you do not reach an agreement with the appeals officer, you may be able to take your case to the U.S. Tax Court, U.S. Court of Federal Claims, or U.S. District Court where you live.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of John Jastremski, Jeremy Keating, Erik J Larsen, Frank Esposito, Patrick Ray, Robert Welsch, Michael Reese, Brent Wolf, Andy Starostecki and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com,  access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

John Jastremski is a Representative with FSC Securities and may be reached at http://www.theretirementgroup.com.

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