Audit! That dreaded IRS demand needn't be so intimidating
For most people, early spring is known as the tax season. Until April 15, they are busy figuring out instructions and deductions on their 1040 forms.
But for the Internal Revenue Service, another tax season is about to begin. In a few weeks, the IRS will begin sending out the first batch of letters to taxpayers who have won the distinction of having their returns audited. Although requests for audits can go out for two years after the returns are filed, the bulk of them are sent out in August and September following the filing season, an IRS spokesman says.
If you receive one of these letters and if your return was prepared with the help of a professsional tax preparer, accountant, or tax lawyer, send the letter to them. In most cases these professionals will have asked their clients for power of attorney to represent them in these situations.
Sometimes taxpayers find they need a little more time to prepare for the audit. If this is the case, a short postponement can usually be arranged with the agent over the phone.
In many cases, the actual audit will be conducted between the IRS agent and your preparer, while you stay away. The reason: Taxpayers, sometimes nervous about being audited even if they have done nothing wrong, often talk too much and say things in a way that could lead the agent to get the wrong idea.
There are two kinds of usual IRS audits, an office audit and a field audit. If the letter calls for an office audit, it means there are just a few items the agent wants to go over with you in his office. These items are checked on a form that accompanies the letter so you will know what supporting documents to bring.
Sometimes the office audit can be done by mail. After you get the letter, it may be possible to photocopy the documents supporting the questioned claims, write a letter of explanation, and send it to the agent. If you don't hear anything more about it, the explanation was probably accepted.
If this is not sufficient, you will have to go to the IRS office. Once you get there, do not discuss any items on the return that were not checked in the letter. If other questions come up, you are entitled to additional time to prepare materials to answer them.
A request for a field audit means your entire return and all supporting documents may be examined. This is conducted in your office or home or in your preparer's office. While everything related to the return is open to examination , even here the agent will usually concentrate on certain areas to save himself time.
Most tax experts recommend that people who get a letter asking for a field audit make sure they have their accountant, preparer, or a tax lawyer with them. A good tax lawyer will sometimes be more up to date and accurate about the tax laws than the IRS agent. So if the agent challenges you on a claim, your representative can keep you from giving in to the challenge automaticaly.
They will also keep you from giving up the right to take disputes to the IRS Appeals Office or the tax courts. One way you can give up this right is by signing a document known as an ''agreement form.'' When you sign this form, you are stating that you agree with the changes made and will pay any overdue taxes. Unless you are absolutely sure the agent is correct - he has shown you an obvious mistake in arithmetic, for instance - this form should probably not be signed without professional counsel going over it first.
Tax experts also recommend that people keep year-round up-to-date records and prepare every return as if it were to be audited. The best defense against an audit are precise records and the documents to back them up.
It is sometimes possible, however, to have claims accepted by the IRS even if you do not have the receipts to prove them. In a case like this, you will have to reconstruct the event that led to the deduction.
If you took some people out to dinner to discuss business, for instance, try to remember who you were with, the firms they work for, the dates, and where you ate. It may be necessary to get sworn affidavits from these people confirming what business was actually discussed. If reservations were made for dinner, the restaurant may still have a record of you, to at least confirm the place, date, and location.
Tax records are a good reason for charging as many business expenses as possible on a credit card; it increases the documentation, giving you a copy of the receipt, the monthly statement, and a canceled check.
A canceled check can also serve as proof of an out-of-town business trip. If you stayed in a hotel, you may have a check made out to the hotel, or a charge receipt. If these items don't exist, or if you paid with travelers checks - a bad move on a busines trip - the hotel may be able to help. Write a letter to the hotel, giving the dates you were there, or as close to the date as possible. While a hotel cannot confirm that you were on a business trip, it will usually provide a statement that you were there. And if there was a business-related convention in or near the hotel, you can get proof of this, too.
It may not always be possible to get every claim approved without receipts, but if your past record is clean and if unsupported claims are not an annual event, you should not have too much trouble getting most of them approved. If you would like a question considered for publication in this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.