Surviving an Audit
Nobody likes to have the taxman come knocking on the door. There are a few simple steps you can take to reduce your chances of being audited, but if you're one of the 0.5 percent who get chosen randomly for the experience, don't panic. Being prepared is more than half the battle.
The most basic thing you can do to reduce your chances of being audited is to make sure there are no math errors on your return. Too many math errors will red flag your return for review. Make sure social security numbers for you and your dependents are accurate. If you won't be able to file your return by the April 15 deadline, file for an extension before the deadline. Attach an explanation for anything that's not obvious. For example, if you report an amount that differs from the amounts on your W2 or 1099s, explain the reason. Be sure to sign your return.
Some characteristics of a tax return, such as filing Schedule C for self-employed individuals or experiencing dramatic swings in income, will increase your chances of being audited. But as long as you reported everything accurately and have documentation to prove it, you have nothing to worry about.
How Are Returns Chosen for Audit?
The IRS uses something called the discriminant function system (DIF), which assigns a score to key elements on your return. If the total score for your entire return is greater than the IRS guidelines, the computer will kick your return out for review by an IRS agent. If the agent feels your return should be audited after reviewing it, you'll be contacted. A very small percentage of returns are chosen completely by random.
There's nothing you can do to reduce your chances except to file close to the filing deadline rather than early. There's some evidence that people who file early may have a greater chance of being randomly selected for audit.
For everything you always wanted to know about federal income taxes but were afraid to ask, see the IRS's surprisingly user-friendly website. View and print any form or publication using Adobe Acrobat Reader (it's a free download if you don't already have it on your computer).
What to Do if You're Audited
During an audit you'll be asked to substantiate certain items by producing receipts or other proof. You may be able to do this by mail. If a face-to-face audit is requested, you have the right to have a representative (your accountant or tax preparer) attend with you or in your place. If you attend, keep your emotions under control, don't volunteer any information, and don't act defensive.
Treat the agent respectfully. Have all of the requested documents with you and organized in a logical manner. It may be best to let your representative answer all questions or meet with the IRS agent without you. If your representative can't answer a question, he will ask you later and get back to the agent. This prevents you from making comments that can get you in hot water and gives you time to think about your answers.
