By: Edward Mendlowitz

Fear of being audited by the IRS is one of the biggest fears people have. But audits are very straightforward and nothing to be afraid of. Specifics:


Correspondence audits are done by mail. The IRS has information about something that should have been on your return but wasn’t. They write you, saying they’re going to adjust your return unless you can prove otherwise.

Loophole: Respond immediately. If you don’t, the proposal will become an assessment and you’ll owe the IRS extra tax plus penalties and interest. If you made an inadvertent error on your return, you may be able to avoid penalties by responding promptly to the notice and explaining the circumstances of the error. If the mistake was reasonably beyond your control, the IRS may excuse any
penalties it has charged.


Office audits are conducted at IRS offices. They are initiated by a letter from the IRS that usually tells the taxpayer the items on his/her return that are being questioned.

Loophole: Try to resolve the issue by mail. You may be able to wrap up an audit without ever setting foot in an IRS office. Write to the IRS explaining that you can’t attend in person but you are enclosing copies of all your substantiation for the deductions they’ve questioned. Time the letter so it arrives at the IRS at least two weeks before your appointment date. Give a telephone number where you can be contacted during the day. It has been my experience that the IRS accepts this method of proving deductions. If your proof is sufficient, you’ll get a letter back from the agent telling you that your return has been accepted as filed–examination closed.

Loophole: Limit your exposure. Take to the audit only the information the IRS asked to see. While office audits don’t generally go beyond the items checked off on the audit notification letter, the IRS isn’t precluded from digging into other areas on your return. If you take only the information requested, the agent will have to go to the trouble of scheduling another appointment to dig deeper into your return.

Caution: Don’t volunteer information. Answer only the questions that are asked by the agent.

Loophole: If you’re missing some proof for your deductions…prepare a detailed schedule for the audit showing how you arrived at the figure shown on your return. Be as detailed as possible. The IRS is not obliged to accept this, but the agent will usually go along with some or all of it if your explanation makes sense and is reasonable.

Trap: Don’t ignore the IRS’s request for an office audit. This can get you in very deep trouble with them. They will disallow every single item on your return, not just the items they say they’re auditing, and send you a bill. Then, you will have to substantiate everything on your return.


Field audits are conducted on the taxpayer’s premises, usually his/her place of business.

Loophole: Avoid having the audit at your home. Have it at your accountant’s office instead. If you allow the agent to come to your home, he/she may very well form opinions about your standard of living. This could lead to questions about unreported income. Another reason to avoid having the audit at your home is that people tend to be more relaxed when audits are held in familiar surroundings. They may very well let their guard down and say something they shouldn’t to the agent.

Reminder: You can never tell the auditor too little.


The best place to have the audit of a business is at your accountant’s office–it’s neutral ground. The agent, however, may try to have the audit at your place of business. Don’t go along with this. The agent may form opinions about the company’s deductions if the audit is held at the business. He may overhear damaging conversations about the company.

Self-defense: Insist that the audit be held at the agent’s office at the IRS. You have a right to have the audit there.

If the audit does not take place at your business, the agent will still want to see the premises. Arrange this for a time when you, the owner, are not present–having the agent meet you there can’t help your case. The agent may get ideas about your life-style if he meets you at your place of business. He may feel jealous. He may decide that your deductions are extravagant.


If you don’t agree with an auditor’s findings, you can take your case to the appeals division of the IRS. The purpose of the appeals division is to settle cases without going to court.

Loophole: You get a fair hearing at an appeal conference. It’s not a kangaroo court. An appeals officer will be more inclined than an auditor to settle a case that appears to be reasonable.

Loophole: Appeals officers can take into account the hazards of litigation in deciding whether to settle. The hazards of litigation are the chance the government might lose the case if it goes to court. If the appeals officer thinks the IRS has only a 50% chance of winning in court, he may settle for half of the disputed amount.


If all else fails, you can take your case to Tax Court. You can go either to regular Tax Court…or to the small case division if the amount of tax in dispute is under $10,000– whichever is appropriate.

Loophole: You have a second chance to settle the case in discussions with an IRS attorney before it is set for court. Like the appeals officer, the attorney will take into account the hazards of litigation, but these carry more weight here. You may have a better chance of settling the case with an IRS lawyer than with an appeals officer.


Loophole: File your returns on time. There’s a high audit rate among individuals who have not filed returns for many years. Eventually these people are picked out by the IRS and made to file their delinquent returns.

Loophole: Attach detailed proof of items for which you’re filing an amended return. Amended returns for large refunds are more likely to be audited than original returns. You can reduce the audit risk by attaching complete detailed proof of the items that are prompting the amendment.

Loophole: Avoid repetitive audits. The Internal Revenue Manual says that taxpayers shall not be subjected to needless and repetitive examinations. If you’ve been audited in either of the last two years on a particular issue, and the audit resulted in no change in your tax bill, you can request that you not be audited on that same issue again.

Procedure: As soon as you receive your audit notice, write to the IRS to claim an exemption under the Repetitive Audit Program. Enclose a copy of your previous audit notice and report. Important: You must request the procedure before your first appointment with the agent.


Good records. If you can document your deductions with the proof the IRS requires, you’ll have no trouble at an audit.

(The above material appeared in the May 1992 issue of Tax Hotline Magazine.)

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