With the IRS stepping up tax audits, here’s what you need to know

Personal Finance

It’s almost summer — time to think about bathing suits and vacations. But this summer there’s an increased chance you’ll open the mailbox to find a thick envelope from the U.S. Treasury.

Welcome to audit season 2011.

Blame federal deficits, wealthy tax cheats and petty larceny, all of which have federal tax authorities clucking over what they believe is a yawning “tax gap” between what people owe and what they pay.

Whatever the reason, the federal government is stepping up income tax audits.


The good news — and bad news — is that audits are increasingly being completed by correspondence, said Gary Iskowitz, a Los Angeles certified public accountant who serves on the IRS’ Tax Advocate panel.

“Over 80% of the audits are going to be conducted by correspondence exam,” Iskowitz said. “They’re far less time-consuming, which means the IRS can audit more people. But if you’re not careful, they can become a paper nightmare.”

What do you need to know about today’s tax audits?

Most audits are targeted: The IRS has largely abandoned the old (and much-maligned) line-by-line audits of yesteryear. The agency is much more likely to focus on a single area or two that appears to be a hotbed of cheating, such as auto donations. With a targeted audit, you’re likely to be asked to provide more information about just a few items on your tax return.

If you have the documentation that clearly shows your deduction was legitimate, you may be able to handle the audit by simply making a copy of your records and mailing them in. Make sure to answer promptly and send your information via certified mail, requesting a return receipt, Iskowitz said.

Quicker challenges: If the agent who reviews your correspondence audit doesn’t like what he or she sees, you could be on your way to tax court. With in-person audits, there are a variety of appeals before a formal challenge.

Options: You can request that a correspondence audit be transferred to a face-to-face auditor. That might be a wise option in some cases. For example, if you’re being audited over business expenses, you might need to explain why an unusual expense was reasonable and customary in your line of work. That’s easier to do in person than on paper.

Do your homework: The IRS is an open book in that it publishes its procedures, rules and taxpayer rights, said Jim Camp, chief executive of Camp Negotiating Systems in Dublin, Ohio. Knowing what to expect will help you be calm and professional.

Harness emotions and take notes: If you do end up in a face-to-face audit, be calm, polite and respectful and take copious, detailed notes, Camp said. There are lots of judgment calls in the typical audit, and the auditor’s impression of you can help determine whether you’ll get the benefit of the doubt.

If you’re aggressive or panicky, the auditor is going to figure you have something to hide. Moreover, emotions can interfere with your ability to accurately understand what’s being said. Instead of responding immediately to every question, write the questions down, Camp suggested.

And before responding, restate the question in your own words — “Just to make sure I’m understanding you correctly, you said that ...”

Hire a professional: The tax code is complex and audits are frightening, unfamiliar territory for most taxpayers. Unless your audit is incredibly simple or involves a small amount of money, you’d be wise to hire a skilled professional to represent you.