The April 15 tax deadline is now receding in our collective rear view mirror, unless, of course, you are audited by the Internal Revenue Service.
In general, the likelihood of being audited is low. But audits have been on the rise in recent years as the IRS tries to boost revenue, said Bill Smith, managing director at CBIZ MHM, a national accounting and consulting firm.
There are several different kinds of audits, Smith said.
Correspondence audits are conducted by mail, and generally relate to a specific item on your return, or small dollar amounts. With a "desk" audit, you may have to go to an IRS office and meet with a revenue agent. An "office" audit, in which the IRS comes to you, is generally just done for businesses.
Typically, you'll learn your return has been selected for an audit when you receive an "information document request" in the mail. The request will specify what documents the agency is requesting and will state the deadlines for providing them.
Smith said if you haven't been working with a tax professional, you might want to retain one if you have been selected for audit. Even if the issue raised in the audit is relatively simple, and you have all the relevant documentation requested, there are procedural hurdles and deadlines that must be met to help things go smoothly.
"Be honest about whether it makes sense to hire a professional," he said. If you've prepared your own return, and the agency is making a simple request for, say, receipts for a charitable deduction — and you know you have them — it may be fine to handle it on your own. But if the amount in question is large, or the tax issue complex, think hard before handling it yourself.
"What you don't want to do is go in, make mistakes, get a giant bill from the IRS and then contact a professional to say, 'Get me out of this,' " he said.
For help in finding an accountant or a tax lawyer, some professional organizations have tools that let you search by ZIP code: The American Institute of Certified Public Accountants and the National Association of Tax Professionals are two of them.
If you respond to the letter on your own, make sure your documents are in order — no receipts in shoe boxes — and submit only as much information as is needed to answer the request.
If you have taken an aggressive, but defensible, position on a tax issue, make sure you are prepared to make your argument.
If you provide the requested information and the IRS decides to impose a "deficiency," or an amount owed, you have options. You can agree with the finding, at which point the agency will assess the deficiency and collect it.
If you disagree, you usually have 30 days to protest. You'll then have a conference with the appeals office within the IRS, which is supposed to act in a nonpartisan way to consider your appeal.
If the agency still thinks the money is owed, you can again disagree, which will usually set off a "90-day" letter, or a statutory notice of deficiency. You'll then have 90 days to file a petition with the United States Tax Court.
If you want to consider tax court, he said, weigh the cost of legal representation with the amount the agency says you owe. If amount is manageable — say, the IRS says you owe $1,500 — you can try to fight on your own, since hiring a good tax lawyer may well cost $1,500 or more.
One bit of good news: Excepting cases of outright fraud, being audited doesn't increase your chances of future scrutiny, Smith said. There is no "naughty" list.