How to Survive a Tax Audit

The below article was written by Jason Notte on February 14, 2018 and originally published on TheStreet.com.

It takes a lot to get audited by the IRS, but it’s still a risk for many taxpayers.

In November, outgoing IRS Commissioner John Koskinen told the Washington Post that the IRS has lost about 20,000 full-time staffers since 2010, including one-third of the compliance staff who get taxpayers to pay. The number of audits dropped to its lowest point in 14 years last year, while criminal investigations dropped 11% from 2016.

“What these numbers mean is that, without adequate resources, we don’t have enough people to perform all the audits we think are necessary,” Koskinen warned.

With even a 1% drop in compliance resulting in more than $30 billion in lost revenue, those remaining at the IRS are incredibly vigilant about audits. The IRS says that every $1 it spends on audits and enforcement brings in $4 to the Treasury Department. While 99% of audits come out clean, Kiplinger notes that the 1-in-143 chance of being audited is closer to 1-in-430, if you don’t own a business, rental house or farm and don’t file for earned income credits or business expenses.

“There are only two reasons to get audited: One is if you’re randomly selected and the other is if you throw up some kind of red flag,” says Matthew M. Jehn, a certified financial planner with Royal Oak Financial in Worthington, Ohio.

Even then, one in 4,400 actually results in a refund. Roughly 10% of all audits end with no change in what’s owed to the IRS.

If you are audited, just make sure it’s legitimate. Paul Gevertzman, a certified public accountant and tax partner at Anchin, Block and Anchin, in New York City, notes that fraudulent tax examinations do happen and fake audit notices have become more prevalent in recent years.

“If the first contact is something other than a written letter, there’s a very good chance that it’s not legitimate and you need to check it out before you provide any kind of information or make any kind of payment,” he says.

If it’s real, however, calm down. Read the letter and see exactly what the IRS wants before heading into the audit. The most common type of audit, a correspondence audit, only asks that you mail in the records necessary to verify the claims on your return. You can go over the audit techniques for your particular business and see what kind of documentation the IRS is looking for, but if you carefully gathered your tax information and had someone competent prepare your return, there is a good chance the notice is incorrect.

“Breathe: It’s not cancer, it’s an examination by the IRS” says Susan Lee, an enrolled agent and certified financial planner in New York City who specializes in tax preparation for freelancers.

If you are subjected to a face-to-face field audit, it is best not to go in alone… or at all. The IRS provides a power-of-attorney form to allow someone with more expertise argue your case. They can either coach you, go in with you or serve as a proxy. The latter might prevent you from creating further complications, but it can also help them fix an error.

Their help will also prevent you from making mistakes like waving the three-year examination period following an audit (which draws out the process) or offering more than the auditor is asking for. It also brings someone into the mix who realizes that field agents aren’t always tax experts and may want to enforce penalties and payments they aren’t entitled to.

“Agents out there are trained to ask unrelated questions that seem innocuous, but they ask them in such a way that they get a taxpayer to say something that they don’t even realize they’re saying about a related business, a related company or their personal lives,” Gevertzman says. “That opens a pandora’s box that, once it’s open, it’s open and you have to deal with that.”

If you’re well-organized, have all of your documentation (including substitute documents, if allowed) and make it as easy on the auditor as possible, advisors say the audit should go smoothly. However, if you do end up owing more, Gevertzman says taxpayers can ask auditors to waive penalties in the interest of getting them their money more quickly. They’ll never waive interest payments, though, which is why advisors suggest paying the full sum as soon as your finances allow. If you can show the auditor authoritative proof that there’s nothing more to investigate, do so and let them move on to the next unfortunate taxpayer.

“A tax return is nothing more than a report card,” Jehn says. “It’s numbers in and numbers out… As citizens, it’s our duty to pay as little taxes as legally possible.”

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.