It's the audit season, and some of you will have the unfortunate and uncomfortable experience of having a prior-year tax return reviewed by the folks at the IRS. Your best bet is to secure representation from a qualified tax professional to do battle with the auditor. It's not cheap, but neither is the potential outcome, if done incorrectly. However, for the "do-it-yourself" types out there, here are a few tips you can use to help you survive and hopefully prosper.
Don't ignore the notice. You generally have 30 days to respond to an audit notice. If you don't respond, the IRS can take action (such as automatically adjusting your tax liability), and the next correspondence you'll receive is a bill.
Read and follow the notice. The audit notice will give you specific information as to what items are being examined, which will help you determine what you need to bring to the audit to substantiate the items in question.
Organize your records. Making the auditor's job easier will win you some points. The auditor will at least believe that you're an organized person and that all of your items are documented and justified. Don't be afraid to group the items in question, or attach an adding-machine tape that matches the tax return. That will allow the auditor to quickly review the important issues. Don't believe those who tell you that you can just throw your records in a bag, drop it on the auditor's desk, and shout, "You figure it out!" That just doesn't work. Remember, it's your legal responsibility to prove your deductions.
Replace missing records. If you're going through your records and find that some of them are missing, call for duplicates immediately. Don't just go to the audit and claim that the records are missing or lost. That does you no good at all. At best, the auditor will request that you obtain the records. At worst, the deduction in question will be denied, since there are no supporting documents.
Bring only what you're asked for. Additional records and items not requested in the original audit notice should be left at home. That way, if the auditor is curious about something else on the tax return, but the item was not on the original audit notice, you can politely tell him or her that those records are at home. It's likely that the issue will be dropped right there.
Don't be a jerk! Contrary to popular opinion, all of the employees at the IRS are people, too. They have wives, husbands, and kids, and they work at the IRS because they're working in their chosen profession. And make no mistake -- they are trained professionals. Taking out your frustrations on an auditor will get you nowhere. Insulting the auditor verbally will not solve any problems. And assaulting one physically is a federal offense. Remember, they're just trying to do their jobs. Be courteous, even if the auditor is not courteous to you or seems unreasonable. If you arrive at the audit with a large chip on your shoulder, you might make the auditor less willing to see things in your light.
Provide only copies. Don't bring original documents to the audit. If you do bring original documents, do not give them to the agent. Request that the agent make copies and give the originals back to you. Once you hand over your original documents, there's a very good chance that they will be misplaced or lost. Then you're the one holding the bag, since the IRS isn't responsible for documents lost in its possession.
Stay on point. The auditor will be able to obtain some very valuable information in what seems to be simple and friendly discussions. Asking about an expensive new car that you might have purchased, or that vacation to the Greek Isles, might give the auditor reason to believe that you're not reporting all of your income and thus expand the scope of the audit. When you meet with the auditor, in essence, you're providing testimony. So answer as many questions as possible with a simple "yes" or "no" response. If you must expand or explain, keep it brief and very much to the point. Don't give the auditor a reason to expand the audit just because you tend to ramble on.
Know your rights as a taxpayer. Remember that an audit is like a small trial. It is an adversarial exercise. So while you can disagree without being disagreeable, it's important that you know your rights, the audit process, and the law behind the deductions you are claiming. It's generally best to settle any difference at the audit level, but if you can't come to an agreement, you have rights that allow you to request a conference with the IRS Appeals Division.
Be aware that appeals officers are even more senior than agents, with much more experience and knowledge behind them. If you're making a specious argument that isn't supported by the tax law, the appeals officer will quickly shoot it down. However, if the issue is complicated and your argument is founded in the tax law and court cases, the appeals officer can make quick work of the analysis -- and might just find in your favor.
Again, your best bet is to retain the services of a qualified and experienced tax pro who can argue your case without passion or prejudice. A qualified and experienced tax pro already knows these techniques, along with many others that might help you quickly resolve a conflict with the IRS. Again, it's not inexpensive -- quality services never are. The tax code has become so complicated that it's unlikely you can know the law as it applies to your tax return and your rights as a taxpayer. A qualified tax pro can be worth every dollar of his or her fee.
But again, for those of you who decide to go the "do it yourself" route, stick to the game plan noted above. And if you ever decide to remove your own appendix, well, good luck with that, too.
When he's not dealing with tax issues, Fool contributor Roy Lewis is a motivational speaker who lives in a trailer down by the river. He understands that The Motley Fool is all about investors writing for investors. You can take a look at the stocks he owns, as long as you promise not to ask him which stock to buy. He'll be glad to help you compute your gain or loss when you finally sell a stock, though.