The vast majority of us get through our tax returns without any major problems. Most of us figure the IRS has bigger fish to fry. Most of the time, you would be right; the odds of the average person being audited are pretty slim in any given year. But as the saying goes, it's best to hope for the best but be prepared for the worst.
Let's look at a few things you can do to be well-prepared if you're chosen for an audit.
Before You Get Audited
Keep good records. If you're not organized, now is the time to start. Keep at least 3 years of tax returns and all the associated documents, bills, receipts, and other items as appropriate. This would include any items related to your income, investments, or tax deductions.
If the IRS disputes any of your figures, you'll have to have the documentation to back them up. For example, if you don't have the documentation for a deduction, they may disallow that deduction altogether.
Organization is an ongoing process. Take care of your records daily, as you accrue them, rather than just once a year.
Watch your red flags. Here are 5 of the things the IRS tends to look for when choosing tax returns to audit:
Large business expenses. Small business owners sometimes try to get away with deducting nearly every expense they have. The IRS knows this. Be careful.
Your "friends." If you're trying to pull a fast one, it's not uncommon for the IRS to get a tip from a friend, family member, or co-worker. The solution is not to do anything wrong in the first place. In lieu of that, don't tell anyone anything that can come back to haunt you.
Complexity. If your business or investment transactions are very complex, the IRS might believe that you likely made a mistake somewhere.
Large Charitable Deductions. If you give significantly more to charity than others in a similar financial situation, the IRS will take a look. Also, if your charitable donations increase dramatically, the IRS will be curious.
Inaccuracies on your W-2 or 1099. They figure if the basic documentation is wrong, there must be other things wrong as well.
Be prepared. In the event that you are chosen for an audit, you should immediately prepare yourself. Review your tax return and associated records. Don't hesitate to get expert advice if you need it; an Accountant or CPA can provide valuable insight and information.
During the Audit
At the time of the audit, do not volunteer more records than the auditor requests. Extra records will never help you but allow the auditor to find something else wrong.
Keep the auditor honest. They can only request information and records related to the official request you received in the audit notification. If they stray from that, don't be afraid to tell them 'no politely.' They have the option of filing a second official request, but many won't bother and will simply let it go.
While the odds of being audited are generally quite small, it is unlikely that you'll exit an audit without paying some additional tax or penalty. The IRS wants to generate as much income as it can.
However, having the proper documentation for every item on your return lessens the probability that you'll have to pay. So regardless of which item they question, you have the paperwork to back up what you claimed on the return.
Provided you haven't intentionally done anything wrong; there is usually nothing significant to worry about. The key is, to be honest when filing your taxes and keep your records up to date. If you do these things, you will survive an IRS audit.