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Surviving a Tax Audit

Quick response, good records are key to a happy ending. And a thank-you note can't hurt

by: Sid Kirchheimer, from: AARP Bulletin, December 8, 2010

When the tax man cometh, it's usually first by mail. Roughly 70 percent of audit notifications arrive as computer-generated letters often lacking the key attention-grabbing five-letter word.

"The IRS prefers a slightly nicer word, 'examination,' " notes Elaine Smith of H&R Block.

But the gentler terminology can lull you into a big mistake: doing nothing. "You'd be amazed how many people procrastinate after they get a letter from the IRS," says Benson Goldstein of the American Institute of CPAs.

The letter typically lists specific items on your return that need clarification, and gives you 30 days to provide the information. If you don't, you can expect another letter that's more strongly worded plus a tax bill with additional penalties.

Tips from the tax mama

Here's how to respond, according to Eva Rosenberg, who runs the free-advice website TaxMama:

1. Quickly open any correspondence from the IRS. "If you understand what's being asked and can provide it, call to provide it. If you don't [understand], get representation right away."

2. Provide only what is requested. Trying to overcompensate with additional data can trigger new areas for review. "And when talking with the agent, don't be a motor mouth, because they are taking information that could be used against you."

3. Send copies of requested material. "Trust me, originals will be lost."

4. Mind your mood. "A big mistake when people are being audited — by correspondence or in person — is they are hostile and angry."

5. Follow up with a phone call or letter. This is a smart move and shows you're concerned, compliant and courteous. "Niceness goes a long way; a thank-you note can go into your file and may be helpful down the road." And for the immediate audit, it may sway IRS agents against pursuing maximum penalties.

6. If you're summoned to an IRS office or an agent comes to you for a field audit, you'll probably be wise to get representation — flying solo can be risky. There are three types of people who can legally sit in for you:

Enrolled agents. They are your least expensive choice, and often your best. They may be accountants; many are former IRS agents. All are specifically authorized by the U.S. Treasury to represent taxpayers in audits and other matters before the IRS. Fees start at $100 an hour. To find one, contact the National Association of Enrolled Agents.
Certified public accountants (CPAs). They are allowed to represent taxpayers in audits, but unlike EAs, they are not required to stay abreast of current tax laws. If you choose a CPA, you will want one with past tax audit experience. Fees start at $150 an hour. Find a CPA at the website of the American Institute of CPAs.
Tax attorneys. They should be used for only the most complex and serious cases, such as when the IRS suspects fraud or other criminal activity. Fees start at $400 an hour. You can find a lawyer by contacting your state bar association.

Sid Kirchheimer writes about consumer and health issues.