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How do I prepare for an IRS audit?

May 16, 2012

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA


Q: I just found out our 2010 federal income tax returns are going to be audited. My husband and I are both self-employed, so we each file a Schedule C. Should we hire someone to represent us, or just go ourselves? My husband prepared our taxes the last couple years.

A: The first step is to take a deep breath and stay calm. The phrase "IRS audit" strikes fear into people's hearts, but it shouldn't. Remember, an audit is not an accusation of wrongdoing, and a certain portion of tax returns are selected for audit purely by random.

The next step is to get all your records ready. Since you and your husband are self-employed, you may have claimed some business expenses as deductions, so make sure those receipts are in order. Also, any basic bookkeeping you do to keep track of income and expenses might help clarify the situation.

The third step is to decide the question of whether you need representation. If you believe you have filled out your returns correctly and paid the right amount of taxes, you may not need any help. This depends in large part on your husband's level of confidence that he knows the tax rules related to self-employment. As a middle ground, if you are at least reasonably confident in your returns, you might want to see if a serious issue results from the audit, and bring on representation only if you need to appeal a finding.

According to the IRS, there are three ways that returns are selected for an audit:

  • Randomly, or by a computer formula.
  • Due to a mismatch in records, such as when a W-2 or 1099 reported by a payor doesn't match what the recipient reports to the IRS.
  • When related to other returns that are being audited (e.g., if someone you do business with is being audited, your return may be audited as well.)

As preparation for your audit, and to help you to decide whether to seek representation, you may want to ask why your returns were selected for audit. If you were selected at random, and you are confident in your returns and your records, then there is no reason to believe there will be a problem. Speaking of records, that is another way to get an advance sense of what interests the IRS about your returns. The IRS is likely to request certain records in connection with the audit, and what they request may give you an idea of whether the process will be routine or more complicated.

For more detail, the IRS has some helpful audit resources on its website.

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