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Jordan Goodman is the author of Everyone's Money Book, available at 888-201-6300. This is the third edition of the book. You can also visit his Web site at www.moneyanswers.com. He talks with us on Thursday mornings.
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April 10, 2003
"Dealing with IRS Audits"
 Listen
The IRS has just sent out 2,000 letters as part of its National Research
Program, in what will by the end of this tax season be a total of 50,000
audits. Because of budget cuts and other priorities, the number of IRS
audits has been dwindling in recent years, but now they are making a
comeback.
Not all audits are the same. The 2,000 letters will be announcing detailed
audits of an entire tax return; another 30,000 audits will demand a
face-to-face interview, but with only select portions of the return to scrutinize.
And, 9,000 audits will be conducted by mail -- another 8,000 audits will happen
without you even being contacted or knowing it is happening to you.
So, what are some of the most common flags to trigger an audit?
- Your income is greatly reduced from previous year’s returns. It is, of
course, possible that you had a really bad year, but if the IRS catches you
vastly underreporting your income, that could trigger its suspicion.
- Your deductions are far more than in previous years. The IRS has a pattern
of which deductions you claim and for how much. If you claim a large number
of additional deductions, and for many more dollars, it will want to make
sure those deductions are legitimate.
- You work in a cash business. So, if you own your own business or get paid
in cash, like as a waiter or contractor, the IRS wants to make sure you are
not underreporting income.
So, what happens if you get one of these audit letters? First step is not to
panic, unless you know you are hiding something. Assemble all your records
and receipts and go to the IRS office when scheduled. If your return is
complex, it is fine to bring your tax adviser or accountant along with
you -- just expect to pay them for their time in preparing for, and being at, the
audit. You will know what questions the IRS has in advance, so you or your
adviser can research the question and even put a letter together explaining
your situation and position. If you go to the audit alone and feel you are
getting in over your head, you can say, “Stop, I need professional advice
here,” and then reschedule a follow-up meeting.
If you are picked to be audited by this new program, consider it an honor -- and almost downright patriotic. The IRS is using the program to improve its
audit selection process, so that its computer program will be more likely to
highlight returns with fraudulent or incorrect information. Just another way
for you to help out Uncle Sam in his time of need!
For More Financial Tips From Jordan Goodman
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