IRS Audit Preparation Tips

Image attribution: US Internal Revenue Service, US-PDGov

In 2010, 1,581,393 IRS audits were performed by the U.S. Internal Revenue Service according to Syracuse University federal tracking data. Of these audits 78.3 percent were by correspondence and 21.7 percent involved in person contact with an IRS agent. Depending on whether or not the audit takes place via correspondence or in person influences how a taxpayer prepares for the IRS audit. In either case, there are several pro active ways to prepare for an IRS audit that can potentially save time, money and reduce tax related stress.

Awareness of audit probability

Being aware of what triggers an audit, and the chance of an audit occurring are a good way to ready oneself for an audit. For example, in a March, 2011 article in Forbes magazine, Tax Lawyer Robert W. Wood states of total 2010 IRS audits 30 percent claimed the Earned Income Credit meaning at least 30 percent of audits occur for the lower end of the income scale. Knowing this, taxpayers might choose to exercise more caution when claiming this particular tax credit. Furthermore, reviewing IRS publications such as the Fiscal Year 2012 Annual Audit Plan provides insight into the direction and focus of IRS audits.

Familiarize with audit process

Knowing how IRS audits work can help expedite the process and avoid unforeseen consequences. Lesson four of The IRS audit video series guide is helpful in audit preparation and provides information about what is required of taxpayers during an audit. For example, during an audit, a taxpayer may receive either an IRS Form 4564 or Form 886-A detailing what specific documents the IRS requires from the tax payer. Additional videos in this series provide a comprehensive overview of the audit process as well as audit tips. IRS Publication 556 provides further information about taxpayer privileges such as mediation during an audit dispute.

Understand the IRS Audit Information Management System

The IRS keeps track of its audit activities via what is identified as the Audit Information Management System (AIMS). This system records the total number of audits, and IRS agent hours spent on audits in addition to audit results according to Syracuse University's Transactional Records Access Clearinghouse (TRAC). Understanding how the AIMS  system works and the audit process can be helpful in gaining insight about how to best handle an audit.

Review IRS audit statistics

The IRS publishes its audit information and this can be directly reviewed by taxpayers to get a sense of what the IRS examines in an audit and how they do it. To illustrate, the 2010 IRS Data Book claims that of the total 1,735,083 individual tax filing 'examinations' that took place in 2010, 92 percent of international tax filings required changes. This indicates international tax filers have a high probability of having their tax filing changed by the IRS if they are audited pointing to a higher level of scrutiny, error or both with these types of audit.

Know taxpayer audit rights

If the IRS selects a specific tax filer for audit, it is important to be aware of the rights granted before proceeding with the audit. For example, according to IRS audit information, taxpayers may record an audit interview or relocate the location of an audit upon prior notice and are also afforded the right to representation. Taxpayers may also appeal audits if they disagree with the changes requested by the IRS.