Tax Experts Reveal How to Survive a Tax Audit

Most tax audits have relatively smooth processes. The nightmare stories of tax audits from hell come from the few cases where taxpayers were unprepared. Lack of preparation leads to a weak defense and a growing mountain of IRS debt.

That’s why we’ve prepared this expert-supported guide for surviving a tax audit.

You should know beforehand that the auditor’s job isn’t to take as much money as possible from you; the auditor’s job is to verify deductions and correct mistakes made on the taxpayer’s tax returns.

However, complications may arise: What happens if you don’t have the necessary documents and receipts? Should you hire a tax professional to handle your audit? How long does the tax audit process take?

Overview of a tax audit and audit defense strategies

You need to know what caused the audit, how to prevent audits from happening in the first place, and what to do if you find you’re going to be audited by the Internal Revenue Service (IRS). Luckily, David W. Klasing, Founder of the Tax Law Office of David W. Klasing, has provided this succinct overview of tax audit defense:

Factors that trigger audits

Most people are unlikely to be targeted, running about a .5 percent chance of being audited. However, the IRS has been increasing the number of audits it conducts, targeting abusive tax shelters, high-income taxpayers, and corporations. These factors can contribute to being chosen for an audit:

• Your income. More than $1,000,000 in income increases your odds to more than 8 percent; more than 10,000,000 in income puts you in the 34 percent chance of audit group.
• Your profession. People who are self-employed and do not receive a W2 for their work are more likely to be selected.
• Home office expenses. Claiming them increases your risk.
• Related examination. If your returns include transactions with other taxpayers who were audited, such as investors or partners, you're more likely to be audited.
• Documents don't match. When Forms W-2 or 1099 or other documents don't match what's reported, you may be audited.
• Kinds of transactions reported. Disproportionately large business expenses, very big charitable deductions, tax shelter losses, excessive itemized deductions, and complex business and investment transactions raise red flags to the IRS.
• Rounded numbers. Be accurate, and check your figures.
• Hiding cash or other income. This is especially risky for people with offshore accounts.
• Audit history. If you've been audited before, your audit risk is higher.
• Random selection. The IRS lists computer screening and random selection as audit triggers.

How to prevent an audit

To prevent an audit — and be ready for one just in case — do all of these things all year long:

• Keep at least three years' worth of records and tax returns
• Keep all checkbook stubs
• Keep all receipts and categorize them
• Keep and organize all bills
• Track cost basis for taxable investments and property
• Make notes about deductible items at the time

In case of an audit

• You are entitled to a representative, such as a tax law attorney or a CPA
• You have the right to appeal any findings, fines, or taxes that arise from an audit
• Submit copies, not original documents to the IRS
• Do not submit anything that was not requested

Many experts will tell you to be organized and cooperative. The problem is disorganization is often a trait of those being audited. Some of these people simply aren’t equipped to take on the IRS.

Most common questions about surviving a tax audit

Can you survive a tax audit without any receipts?

David Reischer: “It might be possible for someone to survive a tax audit without any receipts if the receipts were not a significant source of revenue or expense for the individual or business.

A retail business that has no cash register receipts of all income generated would have a more challenging time surviving an audit than an individual who is missing receipts for minor expenses. In short, survival of a tax audit when someone does not have any receipts will depend upon the individual tax filing.”

David W. Klasing: “Yes. But, not keeping records that should be kept is a badge of fraud. Audits are prove it or lose it. Expenses can be proven to a certain extent through other methods (i.e. estimation, cancelled checks, credit card statements). IRS case law states that the IRS cannot disallow 100 percent of expenses solely over missing receipts, so the taxpayer bears the burden of proof.”

What is the tax audit process?

Arthur Rosatti: “The position of the tax auditor is to get the tax return correct. Their job is to review the return and determine if the information the taxpayer provides is credible. If it is, and the taxpayer can provide proof that it is credible, the auditor will accept the information. However, if the taxpayer does not have the necessary information, the auditor can disallow a portion to all of the deductions.

The auditor's position is not to ‘get you’ but rather just make sure you are not cheating the system by taking deductions that you are not entitled to. Unfortunately sometimes this means that a taxpayer will get certain things disallowed because they do not have the documentation to back up what they claimed on their tax returns. 

I have never worked for the IRS, so I don't know the exact procedure of how an audit starts, but most cases are first flagged by their computer system. At that point an individual reviews the return and determines whether an official audit needs to be done. The examiner will send notice through the mail to the taxpayers last known address letting the taxpayer know that they have a return that is being audited.

From there the taxpayer can reach out to the IRS and start the communication process, or they can go hire a professional to help them. The IRS will typically give 30 days to the taxpayer to reply to the proposed changes. From there is a back and forth between the two parties trying to come to an agreement on what will be allowed and what will not be allowed on the tax return. 

The entire process can be quick and take a few months, or it can drag out over a year. Sometimes the auditor will request a meeting in person to go over any documentation submitted by the taxpayer as substantiation. These meetings can be beneficial to the overall situation.”

How long does a tax audit take?

Susan Carlisle May: “It took about three years, but some of that I wasn't actively working the process.

I received my notice of audit and then had maybe 60 days to respond. The IRS then had 30 or 45 days to respond. It took about six months for the first ruling which they disagreed with all of my business deductions. I then filed an appeal. My material was sent up the line. Months went by with me sending additional letters and support material. A decision was made. I signed the agreement and paid the additional tax. They had allowed my office deductions but not the research trips.

A few months went by and I asked if I could see a written report of the decision. I was told that it was too detailed and that I wouldn't be able to understand the rules of law. I let another few months go by and decided that I had the right to see a written report whether I understood it or not. By this time I had to file through the Freedom of Information Act to get the report. That took five months because my first request was lost. After I got my report, imagine my surprise when I had no problem understanding what was written. The IRS lady didn't even know the difference between my nonfiction and fiction books. By this time I had one book published and was contracted by Harlequin.

I started the appeals process which took a lot of time but I wasn't going to give up. I was in the right and I knew it. I filed with the tax court, but because I had paid my claim I couldn't go through them. So I had to do it through the regular process. I sometimes made hour long phone calls, every two months to see where my paperwork was. One year my case was closed on December 23 without ever notifying me. I reopened and went at it again.

My congressman retired and I started with a new congressman's office. At one point I went to my accountant's office and had him help me figure what I should be receiving back. Finally, I read the law closely going through each link and wrote a rebuttal letter to their decision.They told me I would be getting my money back. The day it was to come in the mail I received a letter telling me I had gone over the two years and that they wouldn't be sending me the money. But I still won!”

How much does it cost to hire a tax attorney, certified public accountant, or enrolled agent?

Chris Cooper: “Attorneys and CPAs generally charge $250/$350 hour for this kind of representation. EA’s are generally less per hour, but not always. What the reader wants to do is interview these representatives and see if they have experience with the type of audit and the type of business the reader is in. This helps to understand the unique items of the audit of the particular business, and any special areas (such as tip inclusion rules in a restaurant).”

Can you outsmart the IRS in a tax audit without hiring a tax professional?

Susan Carlisle May: “The IRS can be wrong. They usually get their way because it takes so long to fight them. Read the law regarding your issue on IRS.gov. Keep clicking links until you find the answer. Don't give up if you think you are in the right — prove your case with law. Quote their stuff back to them. I won my case and they were sending my money back but it had taken over the two year time frame so I didn't get it back. But I did win without a lawyer or my accountant”.

Helpful audit advice from tax experts and audit survivors

David Reischer, Attorney and CEO of LegalAdvice.com
“It is incumbent on an individual to ask the IRS why their tax returns were selected for an audit. The IRS may not offer a reason unless an individual asks why they are being selected for an audit. It is important to prepare for an audit by understanding the information that is to be targeted by the IRS. Therefore, inquiring about the reason for the audit is a critical first step to prepare. Most IRS notices will also contain a number in the upper right corner that will further inform the person about the reason for the audit.”

Chris Cooper, California Licensed Professional Fiduciary and Founder of ChrisCooper.com
“The first thing one MUST do once the taxpayer is informed that they are being audited is to hire someone to represent them before the IRS. These professionals are called enrolled agents (EA), certified public accountants (CPA) and tax attorneys. Tax preparers are NOT considered representatives, unless they have one of the above three licenses. NO ONE SHOULD EVER REPRESENT THEMSELVES IN AN ADVERSE SITUATION. Also, remember, before the IRS YOU ARE GUILTY UNTIL YOU PROVE YOUR INNOCENCE. This is very different than criminal law where the burden of proof of guilt is on the prosecutor; the IRS can just accuse you and assess you taxes, penalties and interest and it’s your job to prove you don’t owe them. This is why you NEVER, EVER REPRESENT YOURSELF. I don’t represent myself!

Once you have hired your representative, then the representative will have you sign a Form 2848, Power of Attorney, which tells the IRS that this representative has permission from you, the taxpayer, to discuss your tax returns being audited with the IRS. This is also true if you are being audited by a state or local tax authority, including unemployment insurance and workers compensation taxes. Your representative will contact the auditing revenue agent and schedule time with them to start the audit.

Then your representative will tell you what to get together, go over things you have and what you don’t have, and what you may be able to do about what you don’t have such as contacting third parties, such as banks, real estate title agencies, etc. to get copies from them, and what things can be reconstructed from other records, such as car repair records for business use of your car, your calendar of appointments to approximate mileage logs, and other allowable techniques.”

Robert Kravitz, Audit Survivor
“Turn everything over to your accountant; do not represent yourself.

If you have done something seriously wrong, whether criminal or not, consult with an attorney; remember, the accountant does not have the confidentiality rights that an attorney has.
 
As to lawyers, however, they often love handling audits and tax problems because they can make so much money on them; if you have not done anything legally wrong, let your accountant handle things. Their fees are less, this will save you money, and the audit will move along further.

Work with an experienced accountant. If they have worked for the IRS at one time, they know how the game is played and this experience can help you. Try not to get emotionally involved in the audit; in my experience the toll it takes on your life can be far more detrimental than the audit itself.
 
If you appeal an audit, get ready to wait. In my experience years ago, it took almost three years before the appeal was reviewed. I lost. It might have been better to just work out a payment plan from the start.
 
Remember, should you owe a lot of money, you can ask the government for a compromise.  Why would the government want to take less money than they can get? If they can get, for instance, $50,000 on a $75,000 tax bill now instead of it being paid off over several years, they may just accept the $50,000 and wipe the rest off the books.

Once you are audited, expect the government to pull your tax return for review every year for about five years, possibly longer, just to see if you are flying right.
 
Depending on what state you live in, your state will also abide by the IRS audit and bill you for what you may own them. In California, it is very quick. Expect a bill as soon as the audit is completed. In other states, it can take one to three years.

These comments are based on my own experience owning businesses over the past 40 years and after two audits.”

Arthur Rosatti, Esq. Tax Attorney at Ashley F. Morgan Law Firm
“Contact your tax preparer (if you had one prepare your return). Certain people, those with more complicated returns, are at greater risk for an audit, such as people with many itemized deductions, anyone with a Schedule C, or business owners.

I often recommend these people have professionals prepare their taxes to help insure the proper deductions are taken. Additionally, many tax preparers offer audit protection services for an additional fee. It is often beneficial to pay for these services if you have one of the more complicated return types.

Next, you need to review your return. If you had someone prepare the return, you can review with him or her. If you prepared the return yourself, then you need to carefully see what deductions were taken. The IRS will provide you with details about what issues they have spotted on your return. Any deduction that is at issue will need support. You will need to gather things like receipts, credit card statements, bills, bank statements, etc. to substantiate any of the deductions.”

Susan Carlisle May, Author and Audit Survivor
“First, remember as the taxpayer the IRS works for you. Don't let them intimidate you. Individuals need to contact their congressman or woman. They have a person in their office that helps people who are being audited.

Do not sign or pay until you understand and/or are completely satisfied with the decision. After you sign or pay, you have less recourse if you think the IRS is wrong. Always ask for a written explanation of the IRS decision.

Don't trust that the person who does your review knows all IRS law. My lady thought I wasn't smart enough to understand the decision.

Mark your calendar and call the IRS if you haven't heard from them in the time frame they stated in their letter. Also note numbers and who you spoke to. I promise you will need this information later.”