Overall, the odds are reassuring. The vast majority (99%, in
fact) of individual income tax returns skate safely past the IRS
Better news: The 1-in-100 chance of being called on the carpet
really overstates the severity of the situation. Fully 70% of all
audits are handled by mail, not by mano a mano combat with an IRS
agent. And, if your return doesn't include income from a business,
rental real estate or a farm, or employee business expense
write-offs, the basic 1-in-100 chance of being challenged jumps to
Another piece of rarely reported good news: Each year, tens of
thousands of taxpayers walk out of an audit with a check
the government. In 2011, for example, 66,381 audits resulted in
refunds totaling over $1 billion.
The 1-in-91 chance of being audited is the overall average. Your
actual odds turn on the kind of return you file and the type of
income you report.
, based on official IRS data on returns audited in 2012, will give
you a good idea of the odds that your personal 1040 (or 1040-A or
1040-EZ) will be selected for review -- either by mail or in
person. And, remember, even if it is, there's a 1-in-7 chance
you'll walk away unscathed or be one of the lucky ones whose audit
results in a refund.
With few exceptions, of course, the IRS doesn't randomly choose
which returns to audit. The few thousand random reviews each year
are performed to help the IRS calibrate the computers that identify
the juiciest targets.
Over the next few months, the IRS will be plugging data from
more than 140 million tax returns into a computer that scrutinizes
the numbers every which way and ponders how the picture you paint
of your financial life jibes with what it knows about other
taxpayers. The computer tries to spot returns that are most likely
to produce extra tax if put through the audit wringer. The
computer's choices are reviewed by a human being who can overrule
them if, for example, an attachment to your return satisfactorily
explains the entry that set the computer all atwitter. Short of
such a veto, your name will go on the list.
Even if your return survives the computer's scrutiny, you're not
necessarily safe. You may have listed an investment in a tax
shelter the IRS is particularly interested in, for example, or the
agency might decide to take a closer look at your return because it
smells of the latest scam du jour identified by the IRS.
And there's always the chance that someone has fingered you as a
tax cheat. The IRS encourages such tips and even pays a bounty for
leads that pay off in extra tax.
Whatever the reason you're chosen for an audit, it's chilling to
get the word that the IRS wants to examine your return. After all,
everyone knows that the IRS was able to do what J. Edgar Hoover and
all the G-men of the FBI couldn't do: put Al Capone behind bars.
Even if you have no reason to think you did anything wrong, you
can't escape the anxiety that accompanies an audit notice. For one
thing, the return being audited is unlikely to be the one you just
filed. A lot of taxpayers are only now hearing from the IRS about
their 2011 returns ... and some 2010 returns are just coming up to
bat. (Generally, the IRS has three years from the due date of your
return -- until April 15, 2016, for 2012 returns -- to initiate an
How It All Begins
You'll get a letter announcing your fate. The simplest audit --
a correspondence audit -- requires only that you mail in the
records needed to verify a specified claim on your return. In a
field audit, an IRS agent comes to your home or place of business
to go over your records. Most common, though, are office audits,
which involve getting yourself to a local IRS office. You'll
probably have at least a couple of weeks to prepare. If the
appointment is set for an inconvenient time or you find that you'll
need extra time to pull your records together, call the IRS
promptly to request that the audit be rescheduled.
The written notice will identify the items on your return that
are being questioned -- usually such broad categories as employee
business expenses or casualty losses -- and outline the types of
records you'll need to clear up the matter. Office audits are
usually limited to two or three issues, so you won't be expected to
haul in all your records. What kind of evidence do you need? Here's
how a retired IRS official with 30 years of auditing experience
answered that question: "I expect to see the records you used when
you prepared the tax return. You must have had some. Otherwise, how
did you know you gave $5,000 to charity?"
Also, beware that auditors are sometimes looking for more than
proof of what's on your return. They're also interested in whether
income that should have been reported was left off. That could mean
a review of your bank records, for instance, in search of deposits
that might represent unreported income.
The best way to begin preparing for your meeting is to pull out
your copy of the return being audited. Before the IRS puts your
forms to the test, do the job yourself. Pore over the items being
questioned and pull together the documents that support your
entries. Of course there will be gaps, but don't automatically
concede defeat. Try to reconstruct missing records.
-- If, as luck would have it, you can't find the return, call the
IRS office that contacted you and ask how to get a copy.
-- Get copies of canceled checks from the bank or duplicates of
receipts or written statements from individuals who can back up
-- If you can't come up with written evidence for certain entries,
prepare an oral explanation.
Your records needn't be perfect. If you can reasonably explain
how you came up with a figure that's not fully corroborated by the
evidence, the IRS may well accept it. The IRS likes to stress how
reasonable audit personnel are. However, when you're pulling
together your records, remember this: The more thorough your
documentation is in general, the more likely an auditor will cut
you some slack on an occasional point.
Do You Need Help?
You don't have to go to the audit at all. You can avoid it by
hiring someone to go in your place. Such a representative must have
written authorization to act for you, and the IRS provides a
power-of-attorney form --
-- for this purpose. Whether you go alone or hire a representative
to go with you or in your place depends primarily on the issues
involved. If they're relatively simple, cut-and-dried matters, you
may be able to settle things without help. When matters are more
technical or require interpretation of the law, however, it's more
likely you'll need assistance. You have to make this judgment, and
it will turn in part on how you feel about going head to head with
the IRS. If you're scared, by all means get someone to go with you
or in your place.
If someone else prepared your return, let him or her know about
the audit and ask for tips on how to get ready for it. Whether you
want this person to go along may depend on the cost to you.
Although the IRS prefers to wrap up cases with one meeting, if you
don't agree with the auditor's conclusions or need time to round up
extra evidence, you can schedule a follow-up meeting. Unless you
fear you might capitulate if you go to the audit alone, you may
want to try to settle as many issues as you can by yourself.
If disagreements remain and the amount of money at stake
justifies the expense, you can take an adviser along to the next
session. That way you'll have help when you really need it but
won't have to pay for hand-holding while you clear up routine
And note this:
The Taxpayer Bill of Rights
gives you the right to stop an audit in its tracks if you decide
you want representation. If the audit begins to veer off of the
topics you are prepared to discuss, for example, you can call a
halt to the proceedings and seek help if you need it.
The Big Day
The key to success is being well prepared. Forget the old
slapstick routine of dumping a box of canceled checks and ratty
receipts on the auditor's desk. That suggests your records are
sloppy, and that's the last impression you want to give. Remember,
it's up to you to back up the information on your return. The
better organized your records, the more smoothly things will
Establish credibility right from the start. If you do, there's a
better chance a gap later may be overlooked. Say that the audit
notice states that your interest deductions, charitable
contributions, and travel and entertainment write-offs will be
reviewed. If you're solid on interest and contributions but shaky
on T&E, try to steer the audit to your strong suits first.
Don't go into the session looking for a fight, but don't equate
being cooperative with giving in whenever the auditor raises an
eyebrow, either. If the agent tells you your records don't
substantiate a deduction, for example, ask what might suffice.
Perhaps you can mail it in later.
Don't chat your way into a problem. Keep in mind that the agent
is trained to zero in on tax issues. A comment you consider totally
unrelated to your return might lead you into a thicket. Defending a
deduction by saying you've taken it in the past, for example, could
prompt a review of previously filed returns; discussing the
family's cross-country driving vacation might lead the agent to
recalculate the ratio of business/personal miles for your car; or
bemoaning the problems that led a child to drop out of college
could cost you a dependency exemption. Fear that taxpayers will
talk themselves into trouble is the key reason many advisers
recommend sending a representative rather than showing up to the
audit in person.
Cutting a Deal -- or Not
If you do go, above all, keep your wits about you. Don't be
pressured into settling an issue just to bring the audit to an end.
The IRS argues strenuously that it doesn't judge its agents on how
much extra money their audits produce. Even so, the fact is that
one of the best guides to an agent's efficiency is the amount of
additional tax he or she generates without going through all the
formal assessment procedures or litigation.
Also remember that there may be room for compromise on the issue
at hand. It may save time and money all around to agree on some
in-between point or even for one side to give up on one disputed
item in order to win on another.
Most office audits take from two to four hours. You'll spend a
lot of that time watching the agent crunch numbers. When it's over,
you'll get the auditor's decision -- usually that you owe more tax.
He or she should explain each proposed change to your return and
the reason for it.
If you agree, that's fine. But remember that the auditor doesn't
have the final say. Often, in fact, auditors make mistakes that
cost taxpayers money. If you disagree with a finding, tell the
auditor so and restate your position. He or she may be willing to
compromise to close the case promptly.
You have several options if you opt to fight on. Even if you've
handled things by yourself so far, at this point you may need
professional help. You can ask for another meeting with the auditor
to present additional evidence, or you can make an informal appeal
to the auditor's boss. If you're still unhappy, you can go to the
IRS regional appeal level. Or, you can take your case to court.