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You're being audited by the IRS -- what should you do?

The first notice that you are being audited usually comes in the way of a letter from the Internal Revenue Services (IRS). So now that you realize you have been selected, what should you do?

First, determine what is being audited. You are seldom audited for the last return you filed. The IRS usually audits a previous year's return. Your notice of audit should clarify the tax return year and exactly what portion of your return is being audited.

Will the audit be face-to-face?

A normal audit, known as a correspondence audit, is a letter sent by mail requesting documentation to clarify something on a return. You can mail the requested evidence back; just be sure it is within the given timeframe.

A field audit is more likely if you own a business. This type of audit will be face-to-face; an IRS agent will physically visit your office to go through your records.

How should I prepare?

IRS agents will be looking for evidence of items on your federal tax returns, such as business expenses taken, credits, income verification and so on. They want to see what documentation you used to make your entries.

With your tax return in hand, go through each item and make sure you can justify where you got the numbers. For instance, if you claimed you donated $2,000 to charity, do you have receipts? If not, where did you get the amount from?

If you have good records of everything you did, you should have no problem during the audit. If you need time to gather evidence, you can request additional time. You may need to obtain canceled checks from your bank or duplicate receipts for purchases.

The IRS won't expect your records to be perfect, so a good explanation may be sufficient for some items. However, it is up to the agent to decide to take your word in lieu of physical evidence. Most agents will take your word on a few items if you appear credible and organized in the majority of your answers and records.

Do I need a representative?

Having a representative for your audit defense can be crucial if there are a lot of discrepancies to clarify. A tax attorney knows the tax laws and can often negotiate a better outcome on your behalf.

Source: Kiplinger, "How to Handle an IRS Audit of Your Tax Return," Kevin McCormally, accessed Jan. 11, 2018

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