How to prepare for a tax audit

Though tax audit is a scary process, you can’t avoid it.  Once you receive that ‘invitation’ from IRS, you have to make elaborate preparation to get out of it successfully.  The following tips will help you –

  1. Understanding the red flags – Most of the times tax audit is a result of ignoring red flags.  You should give some time to research the reasons for which tax audit was initiated by IRS.  The important red flags are – filing multiple exemptions, having offshore accounts, claiming excessive charitable contributions, taking undue home office deductions or plain mathematical mistakes.  If you are able to identify a particular reason, you can better deal with the related questions.
  2. Analyzing your business accounts – If you are self employed, you should scan the accounts of your business.  You should particularly check the legitimacy of expenses and deductions claimed by you.
  3. Checking mathematical accuracy of your return – In a hurry to submit your return, you might have made some silly mistakes.  Though the mistakes look small, they may affect your total tax obligation.  You should show your return to a friend who can go through your return without any bias to find out such apparent mistakes.
  4. Justifying your means – The income earned by you should justify your lifestyle.  If you are unable to do that, IRS may use it as a weapon against you in all future actions.  It is very important for you to check your income against your spending.
  5. Checking unreasonable deductions – Over the limit deductions will go against you.  Check the deductions you have claimed and the supporting evidence you have like invoices or receipts and re-check your calculations.
  6. Check your arguments – You have to choose your words very carefully.  If you think that by giving some evasive answers you will get over the audit, you are wrong there.  Such answers may be used against you if IRS decides to file criminal case against you later.  You should prepare for your replies for the interview in advance.
  7. Do not underestimate the auditor – People often make a mistake of undermining the intelligence of IRS auditors.  These auditors undergo vigorous training and they usually have a long experience of dealing with taxpayers.  The safest a way of dealing with such people is to hire a tax consultant so that he can represent you properly.
  8. Finally, know your rights – You are not at all at the mercy of the IRS auditor.  You have a right to know why the audit is conducted in your case.  You can record your interview with the auditor.  You have a right to transfer the audit to another area of your convenience.  If you feel that the auditor is pushing the boundaries, you have a right to report his misconduct.

You should always remember that the tax audit has not been ordered without a reason.  If you are able to read between the lines, you will find out the exact reason why the tax audit was ordered.  That can successfully take you out of this nightmare.