If there's one thing American taxpayers fear more than owing money to the IRS, it's being audited. But before you picture a mean, scary IRS agent busting into your home and questioning you till you break, you should know that in reality, most audits aren't actually a big deal. Most of the time, a tax audit involves answering additional questions the IRS has by mail; it's uncommon to actually meet with an auditor in person. But if you are among the few who wind up face-to-face with an auditor, knowing what to expect and what to do can make the process run smoothly.
Tax audits by mail
The vast majority of tax audits -- more than 75%, in fact -- are conducted by mail. These audits are known as correspondence audits, and they typically come up when the IRS has questions or wants additional documentation to back up your return. Often, submitting paperwork by mail will be enough to bring the matter to a close. You won't ever need to have so much as a brief conversation with a live IRS representative.
In-office tax audits
In some cases, you may be required to attend an in-person audit at a local IRS office. In-office tax audits are necessary when the IRS needs a more detailed explanation than what a document or receipt can provide. If you're chosen for this type of audit, you may need to bring specific documentation along to review. You also have the right to bring along an accountant or attorney for representation, though this isn't always necessary.
Field audits are generally considered the most daunting of the bunch. During a field audit, an IRS agent will come to your home or place of business and conduct a more in-depth investigation of your return. Field audits are typically necessary when a return raises major red flags, or when the IRS has numerous questions about a return.
Tax audit outcomes
Many people assume that audits are designed to get them into trouble, but this doesn't always happen. There are several outcomes that can arise following an audit. In many cases, the IRS will agree that your documentation answers its questions and accept your return as-is. In other situations, the IRS might propose changes to your return, at which point you have the right to agree or contest. If you opt for the latter, you may need to meet with an IRS representative to further discuss your case or request a formal appeals conference.
Now, you should know that almost 90% of audits result in a change to the tax return that was originally filed. That said, those changes could work out in your favor. While it's less common for the IRS to find that you underpaid your taxes, in 2015, over $1 billion in refunds was distributed to taxpayers who underwent audits. Additionally, 9% of field audits and 12% of correspondence audits resulted in no tax return changes whatsoever.
Surviving an in-person audit
If you are among the unlucky few who wind up dealing with the IRS face to face, it's natural to be worried or intimidated. If you bring an accountant or attorney along, that professional will be there to guide you and, ideally, do much of the talking. But if you're going it alone, here's what to do.
First, whether you're meeting with an IRS agent at home or at a field office, get organized beforehand and come prepared with all of your records and documentation. That said, only present information relevant to the issues at hand or questions being asked. The last thing you want to do is open up an additional can of worms and subject yourself to further scrutiny.
Furthermore, don't be rude to the agent you're meeting with or argue excessively. Even if you have nothing to hide, you'll come off as overly defensive, which could arouse further suspicion.
Finally, do not make the mistake of justifying an error by pointing out that you've always done things that way in the past. The IRS has three years to initiate an audit following the date of each filed return. Pointing out an erroneous deduction you've taken in the past isn't going to get you off the hook this year; if anything, it could prompt the IRS to examine your previously filed returns.
In an ideal world, we'd all file our taxes and be done with them. But if that doesn't happen, don't panic if you do get audited. Most of the time, the audit process is quick and painless, and if you're honest on your tax return to begin with, you stand an even greater chance of coming out unscathed.