What should you do if you're audited?
That depends on the type of audit, said Martin Laffer, certified public accountant with Beverly Hills firm Laffer & Gottlieb. There are four types of audits, with varying degrees of severity.
* Correspondence audits are the simplest and least worrisome. They generally result from a mismatch between income or deductions reported on a taxpayer's 1040 tax form and what was reported by a third party, such as an employer, bank or brokerage.
In many cases, the difference amounts to either a math or clerical error, such as reporting income on the wrong line. Sometimes the mismatch can arise because the taxpayer received income on behalf of a child or trust, for example, and simply passed it on.
Generally speaking, taxpayers can handle correspondence audits on their own by simply reviewing the return and responding appropriately in writing.
* Office audits are a bit more serious but still fairly standard. The taxpayer receives a letter from the Internal Revenue Service asking him or her to come in to review certain items on the return. Taxpayers are told what the IRS is looking at so they can bring records to the meeting.
These audits are aimed at establishing that the taxpayer didn't simply make up deductions or credits. Good records are key, but the IRS is fairly reasonable about what's acceptable, said Philip J. Holthouse, partner at Santa Monica accounting firm Holthouse Carlin & Van Trigt.
"If they ask you for something that you don't have, it's perfectly OK to say, 'I'll get back to you,' " he said.
But make a concerted effort to find and organize the required records before the meeting. It's smart to look through your files for the year before and the year after the audited return. Additional years may not be required, but if the taxpayer's records are lacking for the year in question, they might.
* Field audits are when the IRS wants to conduct a review at the taxpayer's residence or business. It's almost always wise to hire an attorney or an accountant to represent you if presented with this type of audit, said Charles Rettig, partner at Beverly Hills tax law firm Hochman, Salkin, Rettig Toscher & Perez.
"If the government asks difficult or somewhat sensitive questions, it could be dangerous for the taxpayer to respond directly," he said. "Misleading explanations can easily change a civil tax examination into a criminal tax examination."
* National Research Project audits are the revamped version of the dreaded detailed audits that required taxpayers to provide proof of every item on their returns. They were only recently reauthorized and only a few have been done, so it is difficult to speculate on how serious or time-consuming they may be.
However, as with any type of audit, experts advise that when in doubt, hire out.
"Generally, the sooner a professional comes in, the sooner the audit goes away," Laffer said.
-- Kathy M. Kristof