Make sure that the audit is real.

Fraudulent tax examinations do happen, believe it or not, and fake tax audit notices have only increased in frequency in the recent years. If the first contact is something other than a written letter, there is a very good chance that it is not legitimate, and you need to check it out before you provide any kind of information or make any kind of payment.

If it is real, don’t freak out.

While it certainly is not something to be taken lightly, but it is also not the end of the world, unless you have intentionally committed fraud. It is going to go a lot more smoothly if you read over the letter and see exactly what the IRS or the state wants before heading into the audit. Federal and state tax offices send out huge numbers of notices advising taxpayers that they owe money. Most of those result from simple data or reporting errors the tax authorities believe you made. If you gathered your tax information carefully and had someone competent prepare your return, there is a good chance the notice is incorrect.

Don’t go in alone.

Unless you are especially deft at preparing your taxes and dealing with IRS or state auditors, you are likely going to want someone to either coach you, or in the cause of an in-person audit, be in the room to help out. The problem is that skilled professional representation is expensive, and only the auditor knows how many hours the process will take. They don’t particularly care about your fees and if they know what they might be in advance, they will offer to settle for that amount.

The audit process works best when it is limited to the issues the auditor raises. Your presence invites incomplete or incorrect answers to the auditor’s questions. An effective taxpayer representative usually a CPA, attorney, or IRS-authorized enrolled agent, will find out what the auditor wants to know, gather the information, and present it clearly and concisely without triggering collateral issues.

Don’t give auditors more time than absolutely necessary.

You have a few months after the end of the year to file your tax return, but the authorities generally have about three years thereafter to examine it and ask anything they want. Those with heavy caseloads who like to ease the burden by asking taxpayers to waive the three year limit are doing you no favors. This allows them to drag out the process, inflating the taxpayer’s cost for representation and increasing potential interest and penalty charges. It lets the agent raise additional issues if new legislation, regulations, or court decisions provide support. You get no benefit.

Don’t underestimate auditors or get steamrolled.

There a big reason for handing power of attorney over to a third party: the IRS is after a specific sum, but has no problem going for more if you put it on the table. Agents out there are trained to ask unrelated questions that seem innocuous, but they ask them in such a way that they get a taxpayer to say something that they don’t even realize they’re saying about a related business, a related company, or their personal lives. That opens a Pandora’s box that, once it’s open, it’s open and you have to deal with that.

That said, an agent’s word isn’t gospel. Many of our financial experts agreed that agents aren’t always experts in the law they’re enforcing. That leaves those representing themselves vulnerable to necessary penalties and payment, but offers tax professionals a chance to not only save their clients some grief, but to educate the agents themselves.

Get Organized.

Having the evidence to back up your income and deductions is always helpful. Granted, it’s usually more helpful the first time around before you get audited, but the audit offers you a chance to not only refute the auditor if you feel they’ve made an error, but defend your own errors as accidental if that’s the case. The state and IRS go a lot easier on people who flat out didn’t get their 1099s, or misplaced them, than those who outright withheld them. Get copies of those documents, or get substitute documentation if they will allow it.

If you have to pay, make it quick.

While taxpayers can ask auditors to waive penalties in the interest of getting them their money more quickly, he notes that they will never waive interest payments. Those add up quickly, which is why our advisors suggest paying the full sum as soon as your finances allow. Since the state and the IRS aren’t going to offer you a great rate on an installment plan and will only put liens on your earnings if you skip payments, it’s best to let them know upfront that there is no more cash coming their way. If you made a mistake, concede it. If you owe something, pay it. If you can show the auditor authoritative proof that there is nothing more to investigate, do so and let them move on to the next taxpayer.