MONEY MANAGEMENTFrom the Virginia Society of Certified Public Accountants - Presented by Dean Knepper, CPA, CFP®
FAQS ABOUT TAX AUDITS
(March 31, 2006) — If there is anything that can strike terror in the hearts of most taxpayers, it’s a tax audit. While it is important to take a tax audit notice seriously, you shouldn’t panic. The Virginia Society of CPAs answers some questions people frequently ask regarding tax audits.
What can I do to avoid being audited?
There is nothing you can do to guarantee that you will not be audited. However, you can protect yourself by making sure you have completed the return honestly and by keeping complete and accurate records so you can substantiate every number on your return. For example, be sure you report all the income you receive, make sure your math is correct, and attach all required forms and documentation. If your return contains any item you think the Internal Revenue Service (IRS) may find questionable, such as unusually high casualty losses, including a letter of explanation may help to ward off an audit.
Is there a time limit as to when the IRS can audit me?
Generally, the IRS can audit your return within three years from the later of the date the return was due or when it was actually filed. If you substantially underreport your income or file no return, there is no statute of limitations regarding when your return can be audited.
How quickly do I need to respond to an audit notice?
You should respond promptly. However, if you feel you need more time to gather your records and prepare for the audit, you may ask for a postponement.
Do I need professional help?
In most cases, it’s a good idea to enlist the services of a CPA or other tax professional. He or she can help by preparing you before you go to the audit, accompanying you to the audit, or by attending in your place. If you decide to go it alone and in the midst of an audit you determine that you need the help of a CPA or other tax professional, you have the right to stop the audit and reschedule it for a later date.
What should I do to prepare for an audit?
One of the first things you should do is read IRS Publication 1, Taxpayer’s Bill of Rights. This document spells out how the IRS must conduct an audit and explains the rights of a taxpayer whose return is being examined. Next, review your return thoroughly to refresh your memory, especially if it’s been a couple of years since you filed. The final step is to start collecting all the relevant records and documentation you need to support your income, deductions and credits.
What is the best way to get through the audit itself?
Following a few ground rules may help the audit progress more smoothly. Be courteous, business-like and on time. Present your records in an organized manner. Supply only the information and records requested — volunteering extra information may open up additional areas of inquiry. Ask to speak to the auditor’s supervisor if you think you are being treated unfairly.
What if I don’t have records or receipts to substantiate my deductions?
If you are missing receipts or other documents, you are allowed to reconstruct your records. This can be time-consuming and expensive, so it’s best to have a system in place for retaining receipts and other documentation to back up your deductions.
If I do owe additional taxes, how quickly will I have to pay?
The IRS will expect you to pay quickly, and doing so will avoid additional interest and collection actions. If you can’t pay the full amount, you may be able to arrange a monthly installment agreement. Be aware that interest will accrue during the time you are making monthly payments.
What if I don’t agree with the outcome of the audit?
If you disagree with the IRS’ findings, you have the right to appeal.
Your first appeal is to the examiner’s supervisor. Should you disagree
with the supervisor’s ruling, your next step is the IRS Appeals Office,
which is independent of the local IRS office that conducted the audit. Beyond
that, you can take your case to the U.S. Tax Court.
The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.
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