irs Archives — Beating Broke

Facing an IRS audit can be a daunting prospect for any taxpayer. However, adequate preparation can significantly ease the process and enhance your prospects for a favorable outcome. Whether you have already received a notice from the IRS or are proactively preparing for the possibility, knowing the proper steps to take is crucial. This guide provides ten essential actions you should take immediately to prepare for an IRS audit.

1. Understand the Scope of the Audit

The first step in preparing for an IRS audit is to understand precisely what the IRS is examining. Audits can range from straightforward requests for a few documents to more comprehensive reviews of your entire tax return. Carefully read the audit notice to identify the years and items under review. This understanding will help you gather the correct documents and also guide your preparation efforts.

2. Gather Relevant Documentation

Once you know the audit’s scope, gather all relevant documentation. This includes receipts, bills, employment documents, investment statements, and any other records supporting your tax return entries. Organize these documents by year and type, making it easier for the auditor to review them. Having thorough documentation can often speed up the audit process and resolve questions quickly.

3. Review Your Tax Returns

Before the audit, review the tax returns in question. Understand every entry you made and ensure you can justify them with documentation. If you notice any mistakes or discrepancies, be prepared to discuss them honestly with the IRS auditor. It’s often beneficial to review these returns with a tax professional who can provide insight and advice on potential issues.

4. Consult a Tax Professional

Consulting with a tax advisor or accountant experienced in handling IRS audits can provide significant advantages. A tax professional can help you understand your rights, prepare your documentation, and even represent you during meetings with the IRS. Their expertise can be invaluable, especially if the audit is complex.

5. Know Your Rights

Every taxpayer has rights under the IRS Audit process, including the right to privacy and courteous treatment. Familiarize yourself with the Taxpayer Bill of Rights and the specific procedures involved in an IRS audit. Knowing what the IRS can and cannot do can help you navigate the audit more effectively.

6. Organize Your Financial Information

Having well-organized records not only simplifies your preparation but also makes a positive impression on the auditor. Use labeled folders or digital tools to keep your financial information orderly. This organization can save time during the audit process and help prevent the oversight of essential documents.

7. Prepare Your Mindset

Approach the IRS audit with a calm and cooperative attitude. Being defensive or antagonistic can complicate the process. Instead, aim to be polite and professional, remembering that the auditor is performing their job. A positive attitude can lead to a more constructive interaction. Additionally, staying composed will help you think clearly and respond accurately to the auditor’s questions, ultimately benefiting the overall process.

8. Plan for the Meeting

Whether your audit is in-person or through correspondence, plan how you will handle the audit session. If meeting in person, decide on the location, whether at an IRS office, your home, or your accountant’s office. Make sure you understand the format of the audit meeting and what will be expected of you.

9. Practice Transparency

During the audit, be transparent and forthcoming with information. If you’re unsure about a question, it’s okay to say you don’t know and that you will get back with the information. Honesty is crucial, as misleading the auditor can lead to more severe penalties.

10. Follow Up

After the audit, follow up on any pending items and comply with any agreements or arrangements made with the IRS. Keep copies of all correspondence and any contracts you sign. This will help protect your interests and ensure compliance.

Preparing for an IRS Audit Helps Things Go Smoothly

Preparing for an IRS audit might seem overwhelming, but these steps can make the process manageable and less stressful. By understanding the audit, organizing your documents, consulting with professionals, and maintaining a cooperative attitude, you can navigate the audit more effectively and with confidence. Remember, preparation is key to successfully handling an IRS audit.

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Catherine Reed

Catherine is a tech-savvy writer who has focused on the personal finance space for more than eight years. She has a Bachelor’s in Information Technology and enjoys showcasing how tech can simplify everyday personal finance tasks like budgeting, spending tracking, and planning for the future. Additionally, she’s explored the ins and outs of the world of side hustles and loves to share what she’s learned along the way. When she’s not working, you can find her relaxing at home in the Pacific Northwest with her two cats or enjoying a cup of coffee at her neighborhood cafe.

We were recently told that our defined benefits plan was being taken away. For those that are confused, a defined benefits plan is what is normally called a pension. For me, I haven’t been around long enough for it to really affect me. Some, who have been around for a very long time and are nearing retirement, it will mean a rather significant chunk of the money that they thought they would have for retirement will be gone. To their credit, our employer is doing it the right way.

Rather than just declaring the fund bankrupt, or letting it run until it was bankrupt, they’ve decided to shut it down gracefully. What that means is that those of us who are vested in the plan will receive a payout of the amount we have vested. And, as part of that, we need to decide what to do with that money. We have four options:

Buy an Annuity. Annuities basically work like this: You give them a lump sum of money, and they agree to pay you a monthly amount back. The total of the payments is equal to some amount greater than the amount that you gave them. It’s usually based on current interest rates.
Roll the money into the company 401(k). I’m already participating in the 401(k), so this would be a logical place to go with it.
Roll the money into an IRA. Also a logical way to use the money. Could be rolled over into a Roth IRA as well. Either way, I have far more control of the money than I would in my 401(k). Also, I don’t believe I’d have to worry about IRA Contribution Limits if I roll it over.
Take a cash payout. They’d just write me a check, minus the 10% early withdrawal penalty from the IRS.

I’ve ruled out option 1 as it doesn’t make any sense to do with the interest rates where they are. Most likely, I’ll be using option 2. But, I just can’t come to a concrete solution. If I take option 2, I add a significant amount of money to my 401(k). More is always better. But, I have no more control of that money than I do with the current money that’s in there. If I take option 3, I still retain the same amount of money in a retirement account, plus I have far more control of where the money is invested than I do in the 401(k). That’s also the con of this option though. I’m no investment expert. I could look to invest in a stocks and shares ISA but as a general rule, most of the investments I’ve made aren’t all that great. Which means it would have to be limited to EFTs and Mutuals which doesn’t afford that much more control than in the 401(k). The final option would be to take the money in a check. The big downside there is that the IRS takes 10% off the top as a penalty. Then, it’s counted as income which gets taxed as income. In our tax bracket, that could mean an extra 15% in tax liability. If it bumps us up into a new bracket, it could mean some of it could be 25% in tax liability. So, I’d pay an instant (or nearly so) 25-35% if I took a check. But, that still means I would receive a lump sum of several thousand dollars. That money could be used to pay off at least one credit card, if not two, and alleviate some of the monthly burden that our debt gives us.

I know that the safest (rightest) answer is to put it into one of the retirement accounts, but having the cash to dump some of our debt would also be very advantageous.

What would you do? If you were in my situation, would you play it safe and roll the money into your 401(k)? Would you take the cash and pay something off to reduce your monthly expenses? Tell me how you would handle this!

photo credit: House Committee on Education and Labor

Shane Ede

I started this blog to share what I know and what I was learning about personal finance. Along the way I’ve met and found many blogging friends. Please feel free to connect with me on the Beating Broke accounts: Twitter and Facebook.

You can also connect with me personally at Novelnaut, Thatedeguy, Shane Ede, and my personal Twitter.

IRS Audit: 10 Things to Do to Prepare NOW