There are many opinions on dealing with an IRS audit. Of all the recommendations, we believe that three are paramount:

1. Prepare for the audit while you are preparing your tax return.
2. Read the explanation of your rights and be certain you understand your rights.
3. Stick to the questions asked and don't make passing remarks.
   

The best time to prepare for an audit is while the data is fresh. Build your file to support every item of income and deduction. Then when a notice arrives, you will have no reason to panic. You won't be required to spend countless hours recreating supporting records. Simply review your files, refresh your memory and prepare your responses. Many IRS inquiries can be resolved through the mail, especially when your initial mail response is complete.

Caution: If you don't understand the notice or don't understand some piece of the information request, seek professional help. In preparing your information for the audit, take documentation supporting only those items that were requested. Stick to the questions that were asked, and don't bring in material that could expand the scope of the audit. You will receive a printed statement of your rights, which will include the right to prompt, courteous, and impartial treatment, the right to a reasonable amount of time to produce requested documentation and the right to receive copies of your tax return from the IRS. You also have the right to have your audit tape-recorded. Any problems with exercise of your rights is reason to call the Office of the Taxpayer Advocate at (877)777-4778.

Remember that the burden of proof is on you as the taxpayer. You must be able to support your deductions and justify your income. If you are unable to support the information on your return, you will be looking at a negative report from the audit. If the report draws conclusions with which you disagree, you should speak with the agent's group manager. If you are unable to resolve the matter with the group manager, you can request a conference with the IRS Appellate Division. There is cost in time and preparation to carry the appeal to a higher level, so it is preferable to get resolution at the agent level. Should you need to go higher, it is helpful to understand that the personnel at the appellate level have authority to negotiate that the lower levels do not.
If you are unsuccessful at the appellate level, you will receive a notice of deficiency. You have 90 days from the date on the letter to file a petition with the tax court. The tax court case will be heard by a tax court judge. Alternatively, you can go ahead and pay the tax and sue for a refund in the U.S. District Court. The advantage of the District Court is a jury, the disadvantage is that you must first pay the tax. Another choice is the U.S. Claims Court, which also requires payment of the tax.

If you continue to lose, but can't pay, consider making an "offer in compromise". If you meet the criteria, your offer can reduce the amount owed based on your ability to pay, and provide you with an extended period to make the payment.

Final words of advice:

1. Most taxpayers are best served by having a tax professional represent them at the audit. By having a tax professional, there is piece of mind that the issues will be understood and that you won't inadvertently say something to make matters worse. You don't even have to attend.
   
   
2. If you find yourself talking to someone with a title of "special agent", don't continue the meeting and get yourself a tax attorney. It is important that you be represented by an attorney in this situation because of the likelihood of criminal issues in the investigation. If an accountant is needed, let the tax attorney hire the accountant to maintain the attorney/client privilege with respect to the work.

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