How to Survive a Tax Audit

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Imagine walking up to your mailbox today and finding a letter from the IRS. You filed your taxes nice and early and have eagerly been awaiting your refund check. Could this be it? Nope, it's a notice of an income tax audit. Your eyes bug out. Audit?! Isn't that only for crooks?

About 1% of all people are audited and there are some things you may have done to trigger the audit. But don't worry just yet. While scary at first, it's probably not as bad as you think and there are actions you can take do to prepare for the audit. Here is a list of ways to survive your tax audit. (See also: 6 Great Places to Get Free Tax Advice)

1. Take a Deep Breath

Unless you've knowingly deceived the IRS, you probably won't be in big trouble. The IRS is likely looking for clarification of a specific portion of your audit and the possible scenarios probably aren't as bad as you're imagining. The mostly likely bad scenario is that you'll have to pay a little more in taxes for income that accidentally went unreported or an expense that you don't have the proper documentation for. Two thirds of audits are conducted entirely by mail, so even if you're audited, you'll likely still be able to take care of this without feeling like you're on trial.

2. Read the Document Carefully

What type of audit is this? There are three types of audits, the simplest being a correspondence audit, which simply asks for clarification of some portion of your tax return (possibly the forms you submitted don't match up with what you employer or bank submitted). These can be solved over the phone or by mail.

An office audit is a bit more involved, but is still usually restricted to a specific item on your return. You'll have to go in and show proof of your numbers, but in most cases, you can do the proper research beforehand.

A field audit is conducted at the home or office and are generally only done for complicated tax filings that involve business operations. It's definitely the most invasive, but if you're not hiding anything, it can be beneficial to clear you of any wrongdoing.

Typically, only a portion of your tax return will be examined in more detail. Finding out what they are looking for will help you determine how much work you need to do and which documentation you'll need to find.

3. Respond Promptly

If you don't respond to your audit notice within 30 days, you'll lose the opportunity to defend yourself to the IRS. Then the agent will send you a bill for the amount they think you owe, and your non-response is the equivalent of agreeing with their assessment. You can get an extension, but responding to their request is a must.

4. Gather Your Documents

If they are going to question you about your deductions, you're going to need to explain how you got to a certain number and for proof of how you got there. Saying you spent about $200 in gas plus another $500 in airfare won't cut it. Get out those receipts, print those email confirmations, and build your case around irrefutable evidence. If you can't prove it, they won't accept it and you'll be left paying taxes on an extra $700 you thought you could deduct.

5. Know Your Rights

Don't go in blindly hoping for the best. Know your rights, because taking advantage of them could save you a lot of time and stress. For example, did you know you can take a sound recording of any meetings (provided you let them know in writing 10 days beforehand) and that you have a right to ask that the examination take place at a reasonable time and place that is convenient for all parties? You don't have to go running to them just to have them try and take money away from you!

6. Don't Be Afraid to Get Help

You don't have to go about this alone. If the issue isn't a simple error than you can easily fix yourself, consider hiring a tax professional with audit experience. Not only can audits cost you what the IRS feels you owe, they can also be very time consuming, so the combination sometimes means it's often better to pay someone who can give unbiased help and build a solid case for you.

While the process certainly won't be fun, the outlook probably isn't as bad as it may seem at first. As long as you're not intentionally fudging your numbers (and possibly if you are), the penalty will likely be minimal. Follow these tips and your scary experience will be a lot less nerve-wracking!