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Life Advice
About....
An IRS Audit

This Life Advice® section about An IRS Audit was produced by the MetLife Consumer Education Center with assistance from the Internal Revenue Service.


What Is an Audit?
Why Me?
Which Deductions Are Likely to Be Challenged
What Now?
Do I Need Professional Help?
Can I Appeal the Findings?
Audit Advice
For More Information

Fear of being audited by the Internal Revenue Service (IRS) can leave even an honest taxpayer unnerved. It's important to be truthful when filing your taxes, of course, but it's even more critical to be prepared to substantiate your return with complete records if and when the IRS comes knocking.

What Is an Audit?

An IRS audit is generally an impartial review of your tax return to determine its accuracy. It is not an accusation of wrongdoing. But it is important to know that you, the taxpayer, have the burden of proving that your return is accurate. The IRS does not have to disprove anything. For example, if you gave $100 worth of old clothing to a charity but did not receive a receipt or have other proof that such a gift was made, you could be in trouble if you're audited. If the IRS questions the deduction and you cannot provide proper evidence that a gift, in such amount, was made, the deduction may be disallowed.

Why Me?

There are three categories of people most likely to be audited: people in cash businesses, certain professionals and people taking unusually large deductions.

Which Deductions Are Likely to Be Challenged?

The IRS mandates that certain deductions must exceed a minimum percentage of your income before you can claim them. For example, medical deductions must exceed 7.5% of your income, and casualty loss deductions must exceed 10% before you can claim them. Only a small number of taxpayers qualify, so if you claim these deductions, keep careful records.

The IRS is also likely to look at your contributions to charity. If you deduct more than the IRS's statistical norms, you may be audited. You must have a receipt (not just a canceled check) for any single donation of $250 or more. If you do not have a receipt, the IRS may disallow the deduction. A home office deduction may also be questioned. If you deduct expenses related to a home office, that office must be used solely for business-related activities. You must also perform the majority of your business in that office. A doctor who uses a room at home to do bookkeeping would not qualify for a deduction because it is not his or her main place of business.

The IRS may also audit if they receive a tip that you are cheating on your tax returns.

What Now?

If you are notified that you will be audited, take it seriously but don't panic. First, read the letter from the IRS carefully and figure out what you are being asked to do. It may be as simple as signing your return. There are three basic types of audits, and the letter will explain which one applies to you:

Do I Need Professional Help?

Probably. Taxation is very complicated and technical, and you will benefit from having an expert on your side. If you had an attorney or CPA prepare your return, you may want to bring that person to the audit. Professional tax preparation services will sometimes send someone to accompany you to an audit. Weigh the amount of tax in question against the cost of bringing a professional with you.

Can I Appeal the Findings?

You can either agree or disagree with the auditor's findings. If you agree, your experience with the IRS is finished upon completion of some paperwork and payment of any outstanding amounts. If you disagree with the auditor, the issues in question can be reviewed informally with the auditor's supervisor or you can appeal to the IRS appeals office, which is independent of the local IRS office that conducted the audit. If you do not reach an agreement with the appeals officer, you may take your case to the U.S. Tax Court, U.S. Claims Court or U.S. District Court. The Tax Court generally hears cases before any tax is assessed or paid. The Claims Court and District Court generally hear tax cases only after you have paid the tax and filed a claim for refund.

If you cannot decide to agree or disagree, the IRS has formal procedures to help you make up your mind. Within a few weeks of your audit, you will receive a letter that gives you 30 days to either agree with the auditor or file a formal appeal. The letter will explain the steps to take, depending on your choice of action. If you do not respond to the 30-day letter, or if you do not reach an agreement with the appeals officer, the IRS will send you a "statutory notice of deficiency," giving you 90 days to bring your case to the Tax Court. If you take no action, you lose your right to go to Tax Court, and the IRS will assess the additional tax against you.

Audit Advice

If you have prepared your tax return truthfully and have saved receipts to back up your deductions, notice of an IRS audit should not make you unduly nervous. IRS employees, after all, are only doing the job we pay them to do.

For More Information

PAMPHLETS FROM THE FEDERAL GOVERNMENT

The quarterly Consumer Information Catalog lists more than 200 helpful federal publications. For your free copy write Consumer Information Catalog, Pueblo, CO 81009, call 1-888-8-PUEBLO or find the catalog on the web at www.pueblo.gsa.gov.

January 1999
Revised: January 2006

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