Personal Finance > Taxes
You're being audited, now what?
Hundreds of thousands of taxpayers get audited each year. If you're one of them don't panic.
February 4, 2003: 12:13 PM EST
By Sarah Max, CNN/Money Staff Writer

New York (CNN/Money) - - More than 100 million tax returns are filed each year, of which less than 1 percent get audited. But you managed to beat the odds. Now the Internal Revenue Service wants to take a closer look at your accounting practices via an audit.

What should you do?

First and foremost, don't ignore your invitation. "Ignoring the notice isn't going to make it go away, and it may even make matters worse," said Jackie Perlman, senior tax research analyst for H&R Block.

If it's any consolation, most audits these days are not that invasive. There are three kinds correspondence, office and field audits. These days the IRS is devoting less of its resources to dissecting the returns of individuals. As such, audits are increasingly handled through the mail with a little more than a quarter of all audits done face-to-face.

"When people think of an audit, they think of going to an IRS office with a shoebox full of documents," said Fred Daily, a tax attorney and author of "Stand Up to the IRS." "That notion is outdated."

Here's a look at the kinder, gentler IRS.

Correspondence audit

These audits are done strictly through the mail and typically deal with just one area of your return.

"The IRS is usually just asking for a document of some kind," said Daily. A common correspondence audit relates to individuals who move their retirement funds from one brokerage to another. "The IRS gets word that you cleaned out your account, but you didn't claim it on your taxes," said Daily. "In this kind of audit you would just need to show that the money in that account was put into a new account."

Unfortunately, you can't assume that one mailing will take care of the situation. "This is the government we're talking about," he said. "Be prepared to send the same document at least three different times."

(For tips on avoiding an audit, click here.)

Office audit

With these audits, which also usually cover a specific area on your return, you'll be asked to schedule an appointment at your local IRS office. You have the option of going alone, with a representative, or sending someone in your place.

"Sometimes tax professionals prefer that the client not come along," said Perlman. "People panic and get upset, and even lose their tempers."

Whatever you do, make sure you're well organized and that you have all the documents you've been asked to bring but nothing more. "Take only what the IRS has requested," said Perlman, explaining that you don't want to invite additional scrutiny. "Often more things are lost by a person volunteering something that wasn't being investigated in the first place."

Field audit

These kinds of audits are increasingly uncommon for individuals, though you may be subject to a house call by the IRS if you are self-employed or work at home. After all, the IRS might want to see that your "home office" really is a place of work and not pleasure and that it takes up as much space in your house as you allowed when you calculated your deductions.

"This kind of audit is likely to be more comprehensive," notes Daily. "So be prepared for full disclosure of your records."

Getting professional help

If you hired someone to do your taxes, you'll want to contact that person as soon as you hear from the IRS. Although you are ultimately responsible for the information on the return, you may be able to get their help at no cost. "At H&R Block, it's generally our policy to fix the return for you if we made the error," said Perlman, who adds you should learn about these kinds of terms before you hire someone to do your taxes.

Whether you decide to hire someone to represent you in an audit depends both on what's being audited, how it's being audited, the money at stake and how well you've been keeping records. "If you have perfect records and can back up everything go ahead and take care of it yourself," said Daily. "But if you don't, it may be in your best interest to hire a professional."

Appealing an audit

The auditor doesn't always have the final say. "Generally you have a right to request a meeting with the auditor's supervisor, and if that doesn't work you can go to tax court," said Perlman.

While there are interesting cases of people who've gone to tax court, lost and appealed their cases all the way to Supreme Court, successfully, Perlman says that if you're going to appeal an audit you need to be prepared to substantiate everything.

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