Got an IRS Audit Letter? 3 Things to Do Now

By Markets Fool.com

The tax deadline for 2015 returns is in the past, which means that audit notices will start to go out. And while you're not likely to receive an audit notice after all, less than 1% of all tax returns are selected for an audit, and average-income taxpayers have an even smaller chance than that. However, an audit can happen to anyone, so here's what to do if you get a letter from the IRS in the mail.

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Figure out what the IRS wants, and if it's right

According to Dave DuVal, VP of customer advocacy at TaxAudit.com, the first thing to do when you get a letter from the IRS is to open it immediately, but don't panic. "You can be audited for any reason, including for no reason at all," says DuVal.

Read the letter, and if you paid someone else to prepare your return, it's a good idea to call and let that person know what's going on. Keep in mind that an audit letter doesn't necessarily mean your preparer did something wrong. Or, if you subscribe to an audit-defense service like TaxAudit.com, the first thing you should do is to let the service know about it.

From the letter, you (or your preparer) can determine the reason for the audit. It may be a simple matter of missing documentation that can be easily handled through the mail, or it could be a bigger issue that requires an office visit. These situations are obviously of completely different magnitudes, so the first step is to know what you're dealing with.

Is the IRS right, or should you fight it?

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After reading the letter, you may determine that the IRS's auditor was right and you do owe extra money. Many times this happens through no fault of your own.

DuVal cited an example of a customer who was living with his girlfriend and her child, both of whom he was supporting. The customer filed his taxes as "head of household", legitimately believing this was the case. However, this situation doesn't technically fit the definition, and the IRS auditors changed his status to "single," resulting in additional tax liability.

If you agree with the IRS's assessment, you have the option of simply paying the additional tax, if any, and being done with it. However, DuVal still recommends consulting with a tax professional before doing so, as many tax situations aren't as black-and-white as they seem.

On the other hand, if you disagree with the IRS's findings, you have the right to submit documentation and/or an explanation why.

Prepare your documentation

After you've determined why the IRS chose to audit you, and you feel that you shouldn't have to pay additional taxes, the next step is to show them why. This means gathering all of the documentation that supports the deductions in question.

For example, if the IRS is questioning your deduction for charitable contributions, gather receipts, appraisals (if you donated property), cancelled checks, and any other paperwork you may have that could substantiate your claimed deductions.

The IRS has three years to audit you from the filing due date (or more, in cases of fraud or failure to file), so it's a good idea to save all of your tax documents for at least this long. For your 2015 return, which was due on April 18, 2016, this means that the IRS has until April 18, 2019, to initiate an audit -- although it's likely to happen much sooner. According to DuVal, you're most likely to get an audit letter for your 2015 return in early 2017 through early 2018

Once you send in your documentation, along with a written explanation of why you disagree, the IRS will review your file and will send a response.

Get professional help if you need it

So technically, this makes four things to do. However, I didn't include this in the "three things to do," simply because not everyone needs to find professional help, especially in the case of a simple audit letter such as a basic request for documentation. Even if you hired a professional to do your taxes, he or she may not be able to offer much help in an audit. To represent you before the IRS, a return preparer must be an CPA, attorney, or an enrolled agent, which refers to an individual who has passed a comprehensive IRS examination. Unless your preparer possesses one of these credentials, you'll need to find someone else to represent you, which can be rather costly.

In fact, it's this expense, as well as the time consumed in the process, that motivates millions of people to subscribe to services such as TaxAudit.com's audit defense, which provides TurboTax's audit-defense services. Services like this cost a small fraction of what you would probably spend paying a professional to defend an audit, so it could be worth considering.

What not to do

Finally, it's important to point out that the absolute worst thing you can do when the IRS sends you a letter is to ignore it. The problem is not going to disappear, and you have a finite amount of time to respond before the audit notice turns into a bill. The IRS letter will require a response by a specific date.

Keep in mind that you'll be assessed interest and penalties on any unpaid balance from the return's due date -- not the date the audit is settled. So it's in your best interest to expedite the process and get the ball rolling as soon as you can.

The article Got an IRS Audit Letter? 3 Things to Do Now originally appeared on Fool.com.

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