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The Ten Commandments of an IRS Audit

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By Jim Buttonow

Behold, the IRS audit. They are rare these days. Only one out of every 184 taxpayers experienced an IRS audit in 2017, and less than a quarter of these audits are conducted in person by the IRS.

For many, navigating an IRS audit looks as simple as parting the Red Sea. Fortunately, most IRS audits are done by mail and are much less intrusive than the dreaded audit where the taxpayer personally meets with the IRS at their office (called an “office” or “desk” audit) or at the taxpayer’s home or place of business (called a “field” audit).

Nine out of 10 audits end in a change to the tax return. In mail audits, the additional amount owed averages around $6,790. For face-to-face audits, the cost is much higher — taxpayers owe an additional $77,309 on average from these audits. Mail audits are fairly simple — taxpayers simply need to respond timely, in writing, to prove a few line items on their return. For office and field audits, or if the taxpayer is disputing the IRS determination in an audit, they should ask a professional to intervene.

In the meantime, for the chosen few who must deal with an IRS audit, there are some do’s and don’ts to follow to successfully navigate an IRS audit — the Ten Commandments in handling an IRS audit.

1. Thou shall not ignore thy auditor

Ignoring an audit will not make it go away. In fact, it will do the opposite — the IRS will just proceed and assess additional tax on the areas that they want to audit on the tax return. In face-to-face audits, the IRS may ask third parties for information about the taxpayer, such as a bank to get information about the income the taxpayer receives or, if they are a small business, a vendor that supplies them with materials for the business. When the IRS requests information from a third party, they are usually trying to determine if the taxpayer is hiding income.

2. Thou shall not bear false witness to the IRS auditor

Never, never lie to the IRS. Lying to a federal agent is a crime. The taxpayer should present their facts to the IRS and their tax return position. If a taxpayer feels like they need to lie, that is a sure sign that they need to hire a tax professional to help.

3. Contest thy wrath

The IRS auditor does not have the final say. If there’s a disagreement on the facts or the application of the tax law, the taxpayer should exercise their right to appeal, and appeal the determination to the IRS Office of Appeals. A few months after the audit concludes, they will get to present their case to an independent person, called an Appeals officer, at the IRS and get a second opinion. If they don’t agree with the Appeals officer, they can take their tax dispute to court.

4. Thou shall file all thy past-due tax returns without haste

For taxpayers under audit, it is the IRS’s procedure to make sure that they have filed all required returns. It is never a good start with the auditor when they have not filed all required returns. The IRS will review, at a minimum, the past six years of filing history. If the taxpayer doesn’t file, the IRS auditor can file for them — called a substitute for return — and include no deductions, credits, or dependents.

5. Thou shall come prepared to thy audit

If the taxpayer is not prepared for the audit, they should be prepared for auditor skepticism and a long audit. For office and field audits, it is best to do a mock audit and know that income is properly reported and the auditor’s selected audit areas are properly reported. If the taxpayer cannot advocate for their tax return position from the start of the audit, they may get many more questions and requests for information from the auditor. The audit may even prematurely expand into other years because the auditor is suspicious that there is a problem.