How to Prepare for an Audit

It's the last thing most people want to see at this tax-paying time of the year: A plain brown envelope marked "Official Government Business" with the return address of the Internal Revenue Service.

But don't panic. The news might not be as bad as you think.

While a full-blown tax audit might be your first thought, that notice might be the extent of your contact with the IRS. The agency might be telling you that you've made a math error on your return that must be fixed. Or maybe something on your W-2 doesn't agree with your tax return. In such correspondence-audit situations, you usually can clear up the discrepancy with a couple of exchanges of information via the mail.

Then again, the worst could happen and that envelope could be a notice that one of your past tax returns is being audited in full. In this case, what do you do?

Sharon Tabor Warren, an enrolled agent and author from Amherst County, Va., says, "If I have prepared the client's tax return for the year under audit, I ask them for an IRS power of attorney, Form 2848, and to forward their audit notice to me. Then, I tell them to sit back and relax -- I'll handle it from there."

This makes a good case for having a professional prepare your tax returns!

Warren continues, "I never recommend that a client call the IRS themselves nor attend the audit. They can unwittingly reveal information that is not required and potentially cause more problems." A tax professional licensed to practice before the IRS can deal with the IRS and attend the audit for you.

Even with professional representation, you still must prepare for an audit by gathering information and taking it to your tax representative. Carol, a Massachusetts resident who endured an audit, says that her three top tips for preparing for the experience are "good records, good records and more good records." In other words, adequate record keeping year round, not just on April 15, is essential in case of an audit.

More specifically, how should you, a taxpayer, prepare for an audit if it happens? These tips will point you in the right direction:

Retain the services of a professional. Enrolled agents, tax attorneys or CPAs may represent you at an audit. They are trained in tax law and can represent you much better than you can represent yourself. To a lay person, reading the tax code is like reading a foreign language. Enrolled agents have been around since the post-Civil War days and go through relatively grueling training in this very area.