The short answer to this question is all the information you have. However, if you’re asking yourself this question, you may really be asking whether the information you have is adequate enough to satisfy the IRS. This is a much tougher question to answer.
PROVIDING DOCUMENTATION AND THE INITIAL STEPS
The very first part of being audited is of course the notice, which comes in the mail and is sent from either a Revenue Agent or Tax Compliance Officer (“auditor”). The initial notice will indicate; (1) the year or years the IRS is examining; (2) the specific areas under examination; and (3) a request to contact them within 10 days to schedule your audit appointment.
You will also be receiving an Information Document Request (“IDR”). This will be a list of all the supporting documentation they would like you to provide for each item under audit. Think of this as a guide for what you will need to gather.
NOTE: Sometimes the IDR will come with the initial audit notice and sometimes it will come after you have scheduled your audit appointment.
After scheduling the audit appointment, it’s time to start getting your documents together. You will receive a confirmation notice for the appointment and possibly a preemptive audit report showing that everything has been disallowed. Don’t worry, this sometimes happens. However, you still have the ability to attend the audit and present your case.
The best approach to gathering your documentation is to be thorough. Also, make sure it is organized. A record book or log of all your expenses is something that will go a long way in keeping the audit short and focused on the originally selected areas. If information seems unclear or it doesn’t match with other related items on your return, this could lead to additional items being examined (which will lead to additional work on your end…and likely it will lead to additional taxes owed).
If you don’t have a record book or log of all your information there are still options. Let’s say all you have is a big box of receipts. Going through those receipts and putting the information into a nice well organized spreadsheet can make a huge difference.
The alternative is to let the auditor go through the receipts. However, most auditors will not go through disorganized receipts…instead, he or she will send you away and reschedule the appointment. If the auditor decides to dig into the box of receipts, you will probably end up getting less credit for your expenses than you otherwise would. Again, this emphasizes the importance of showing up to the audit prepared.
WHAT IF YOU HAVE NO SUPPORTING DOCUMENTATION?
This unfortunately is also a common occurrence and can leave you feeling vulnerable. Without any documentation to substantiate the information you put on your tax return the IRS can completely disallow the expense or deduction. There are ways to combat this. You just have to think outside the box.
You took the standard mileage deduction for all the miles you traveled but, you didn’t keep an actual mileage log. Perhaps you have a meeting calendar or some other form of documentation showing that you at least did attend the meetings you traveled to. By using this information you can find the distance from your home or office, depending on where you generally left from, to the place where the meeting or appointment took place. Though this may not be a completely accurate representation of the miles you traveled, it will still be evidence that there was traveling that occurred and therefore you should be entitled to at least a good portion of those miles.
This is just one example as to the way in which you may need to think to recreate records you don’t have.
THE AUDIT APPOINTMENT
Here is where you’ll have a chance to provide supporting documentation and present your case.
The audit appointment is generally split into three parts.
1. The Interview
The initial part of the audit appointment is the auditor conducting an interview or asking a series of questions. However, don’t think that the interview stops after the initial questions. The audit appointment from beginning to end is one long interview. Depending on how you answer these questions may determine whether additional items are examined.
So, how much information is too much?
IRS auditors are trained to identify all other possible areas of your return that should be examined. If you go into too much detail about a specific item (for the year in question or past years), you may say more than you should.
2. Item and Document Examination
Be prepared to answer in-depth questions not only for the items currently under examination but also for the documentation you will be providing. In addition to this, the auditor may ask questions about items on your return that weren’t selected. These seemingly harmless questions may lead to a broadening of the examination.
This is also where having your documentation organized will be helpful. The easier it is for the auditor to go through the documentation the less likely he or she is to ask more questions than initially intended.
3. The Audit Report / Determination
This comes at the end of the audit appointment. Here the auditor will determine whether the supporting documentation was adequate enough to substantiate the items on your return. Typically, there will be four different outcomes:
- No adjustments (No additional tax assessment or in rare circumstances a refund)
- Partial Adjustment (Some additional tax will be tax assessed)
- Disallowance of all items (Additional tax assessment)
- Request for a second appointment (if unprepared or the audit is broadened)
The request for a second appointment generally is not a good thing because it typically means the auditor is going to examine additional items on your return. However, the request for a second appointment could mean that the documentation provided in the initial appointment was not enough and they want to see additional documentation, which gives you a second chance to get through the audit unscathed. Either way, it may be time to consider professional help.
BENEFITS OF REPRESENTATION
Knowing when to hire representation is vital to surviving an audit. If you are uncertain about the expenses you took or the income you reported it is best to seek consultation with a tax professional. Some of the benefits of hiring an attorney include:
- Your attorney handles all communication with the IRS auditor, which minimizes the risk of you doing or saying something that hurts your case. This is known as “limiting the scope.”
- A tax attorney will build your case and present the evidence in the light most favorable to you. This is known as “framing” your case.
- Lastly, a tax attorney knows where to find Tax Court decisions and other relevant legal authority to strengthen your position (an element often overlooked by taxpayers).
The IRS audit process is not always easy to navigate, especially when you don’t have the documentation to support the information on your tax return. This doesn’t mean that you don’t have options. It just means that the audit process becomes that much more difficult. Just keep the following in mind when preparing for an audit.
- Getting your documents ready and organized is the first hurdle to overcome.
- Recreate evidence of expenses using other available information if you don’t have supporting documents for a particular item.
- Make sure you don’t open yourself up for additional items to be examined in the initial interview.
- Be prepared to answer questions about the items being examined as well as the documentation you are providing.
- Be aware of questions that may seem inconsequential. There is a reason the auditor is asking.
- And finally, hiring a tax professional will ultimately give you the best chance at minimizing the amount the audit examiner will assess and make the process as smooth and stress free as possible.