Keeping Your Cool in an IRS Audit

Dear Readers — 
Unless you filed for an extension, your 2001 tax return was signed, sealed and delivered to the IRS more than a month ago. Whew! It's over — at least until next year.

Or is it? Ever been audited? Trust me, it's not a pleasant experience, contrary to claims of a "kinder, gentler" Internal Revenue Service.

The number of individual tax returns subjected to an audit has been declining. In 1995, it was 1.67%. Last year, it was less than one percent.

However, this won't continue forever. In fact, because fewer returns have been audited in recent years, an IRS spokesperson predicts the trend is likely to soon reverse and start to increase.

Fred Daly, a tax attorney in California and author of several self-help books for taxpayers including "Stand Up to the IRS," (Nolo Press,, says the first thing you need to do when you're notified of an audit is remain calm. Read the letter carefully and try to understand why you're being audited. Believe it or not, the IRS doesn't always spell out that they're specifically interested in, say, reviewing the business deduction you took for the belly dancer in Vegas.

Look at your return to see if you can figure out what might be in question. "Call your tax preparer," says Daly. " Or, if you did your own return, have it reviewed by a professional."

The next step is to get ready for the audit. According to Daly, "Only you can assess whether you have a problem." Translation: You know if you cheated. OK, "fudged." Did you under-report income? Over-state deductions? Do you have the receipts or cancelled checks to back-up the numbers you used? Now is the time to gather them.

In most cases, your return will have been targeted by the Internal Revenue Service computer because it stood out in some way. Something about it — often it's an unusually large deduction — made it out-of-the-ordinary.

Either the amount was significantly bigger than what you have claimed in the past or it's larger than the average amount claimed by people with similar incomes.

But just because "Hal" thinks there's something odd about your return, that doesn't automatically mean you're headed for an audit. That decision is made only after human beings review your return and come to the same conclusion.

Often, the problem is as simple as the fact that you forgot to report that $82.36 in interest you earned on a savings account. If you agree, the simplest thing to do is just write a check for the additional amount (plus interest — don't worry, it will all be spelled out).

Daly, who has represented clients in more than a thousand IRS audits, says those are not the kind of cases that require his services. In more "complex" ones, he says, "Normally, it's not a good idea to cave in" to the IRS.

Daly's book walks you through how to handle an audit yourself. The key, he says, is to leave your "attitude" at home. Treat the session the same way the IRS does — like a business. Try not to take it personally. You want to come across as pleasant, but not subservient. (Think "cool Siamese cat" — not slobbering, tail-wagging, I'll-do-anything-to-please-you golden retriever.)

Try not to get defensive. "Don't feel you have to confess," says Daly.

This sounds obvious, but don't answer any questions that are not asked. Typically, this happens because, in your effort to come across as open and "helpful," you volunteer information which allows the IRS to expand the audit into new areas. The issues mentioned in your audit letter are just a door opener. Once an audit is launched, they can take it in any direction and as far as they want.

So don't bring receipts or material for tax years not mentioned in the letter. The auditor could ask to see them. Now, they're dredging up two more years in additional to last year's return!

According to Daly, it's critical that you understand this next sentence: "The IRS doesn't audit tax returns. They audit tax payers." In other words, the audit process is not so much about mathematics. "It's an effort to determine whether the taxpayer and the tax return are in line."

We're talking lifestyle. While the auditor is ostensibly reviewing the numbers on your tax return, he/she is also sizing you up. What kind of house do you live in? (Excellent reason to always decline the auditor's kind offer to meet with you at your home.) What kind of jewelry and clothing are you wearing? Are you driving a Lexus, but reporting an income of $45,000?

An IRS auditor is definitely someone you do not want to impress. This is not a job interview. "Look whatever your station in life is," advises Daly.

If you can't keep yourself from becoming emotional or sweating profusely or you've got something to hide, you're probably better off hiring someone to represent you so you don't have to show up at all. But don't think for a moment that you can just send, say, Uncle Guido, in your place. The IRS spells out exactly who is allowed to represent you. Your choices: "enrolled agent", CPA , tax attorney or the person who prepared your tax return.

It's a sad commentary on our tax system that even those who are completely innocent can be so intimidated by an audit that they, too, might be better off hiring someone to represent them. Even if it doesn't drain you financially, an audit is at least emotionally draining for the average taxpayer.

While audit notices typically go out 12 to 18 months after your return is filed, keep in mind, an audit might not necessarily cover last year's return. The IRS can go back three years ( longer if criminal intent is suspected). So the audit notice you get could be for your 1999 return.

Save your records!

Here's wishing all your tax returns are boringly average,


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The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.