Generally the first indication that your tax return is being questioned will be a letter from the IRS. In most cases the letter will identify specific items the IRS is interested in, and you will be asked to report to your local IRS office at a specified time for what is called an "office audit."
(Occasionally the letter will simply ask you to provide by mail certain supporting information. If your response is adequate you won't have to appear in person. For a complex return that involves, say, substantial business records, the IRS may offer a "field audit" at your place of business.)
The notification letter will also contain the name of the IRS examiner and the phone number at which he or she can be reached. If you can't appear at the time specified, a phone call will get you a new appointment.
The first thing you should do after receiving an audit letter is to calm down. Despite the horror stories you have heard and the cartoons that usually appear around tax time, IRS examiners are not ogres. They are ordinary and reasonable people doing the job they get paid for, even as you and I.
Next, go through your tax file for the year being audited and gather the supporting papers for each item under question. For example, if the letter identifies charitable contributions as an audit area, assemble all your canceled checks and receipts in some order--probably chronological.
If you have 30 or 40 checks, it will help if you make a list with the date, payee and amount for each. Although the examiner will spend as much time with you as necessary, he usually has another appointment after yours. Anything you can do to simplify the job and save time will be appreciated.
But bring the canceled checks, not just the list. The examiner will want to spot-check items on the list as a minimum, and may want to look at all the documents.
If you claimed a lump sum for cash contributions for which you have no receipts, be prepared to explain how you arrived at the total. Example: Your child deposits 25 cents a week in an alms box at Sunday school. If most of your contributions are substantiated, the examiner is likely to accept a reasonable amount of unsupported payments--but only if you can explain them.
Should you go by yourself or with a professional? If your return was prepared by someone else, he or she can accompany you or can even represent you without your appearing at all. (You have to provide a power of attorney; the IRS has a special form, and every professional should have a supply.)
If the audit simply involves presenting substantiating documents and you have them, you can probably manage yourself. But if it's a complex matter involving interpretation of the regulations you may want qualified help.
You should also send someone else if you have a habit of talking too much. One of the biggest mistakes people make is to offer too much information--particularly on subjects not included in the original audit.
As a general rule the examiner will only question you about the subjects specified in the audit letter. But if you introduce other matters, the examiner can then feel free to pursue them.
Of course you should answer all questions truthfully and present all the pertinent information. But don't ramble--and particularly don't relate stories about other parts of your return or the returns of other years.
Should you decide to try it on your own, you have not made a permanent commitment. If you decide during the audit that you're in over your head and are losing track of what's going on, you can back off and tell the examiner you want to get help.
Don't make a new appointment then. The attorney, accountant, enrolled agent or tax preparer you employ will make his or her own appointment later. And I suggest you don't go along on this second visit.
In fact, don't go on the first visit either if you have a professional representative. He and the examiner are pros and communicate in a kind of shorthand. Stopping to explain each technical comment to you may well interrupt steady movement to a satisfactory settlement.
Next week: Wrapping up the audit.