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What to Do if You Are Audited by the IRS for Unreported Income

March 21, 2024 Uncategorized

What to Do if You Are Audited by the IRS for Unreported Income

Getting that letter from the IRS saying you’re being audited can be super scary. I know cause it happened to me a few years ago when I was self-employed. I totally freaked out at first. But it ended up being not as bad as I thought. If you find yourself in the same boat, here’s some tips on what to do.

Don’t panic

I know, easier said then done. But seriously, try to stay calm. Getting all anxious will just make things harder. Most tax audits are pretty routine. The IRS just wants to verify some info. They’re not necessarily out to get you. So take a few deep breaths and know you’ll get through this.

Gather your records

The audit letter will explain what info the IRS needs from you. This is usually stuff like bank statements, receipts, invoices, 1099 forms etc. Gather everything together so it’s organized and easy to find. Make copies of important docs just in case. You’ll need records from the year they’re auditing you for.

Review your return

Take a look at your tax return from the year in question. Double check it against your records and make sure everything looks accurate. If you find any mistakes, be upfront about it with the IRS. They’ll likely go easier on you if it looks like an honest error versus intentional fraud.

Get help from a pro

I made the mistake of trying to handle my audit myself at first. Big mistake. These things can get complicated fast. Do yourself a favor and hire a tax pro like a CPA or Enrolled Agent. They know how to navigate an audit and get the best result. I found mine thru a friend’s recommendation.

Be responsive

The IRS will give you a timeframe to get them the info they request. Get it to them on time! Respond to all calls and letters promptly too. The more responsive you are, the better. Ignoring them will only cause more headaches.

Keep records of communication

Keep track of any letters, calls, emails etc between you and the IRS. Take notes on convos, follow up with emails to summarize, and keep everything organized. This creates a paper trail you can refer back to if any questions come up.

Consider an extension

If you need more time to pull together records or respond, you can request an extension. The IRS may give you an extra 30-60 days. Just make sure to request it before the original deadline.

Watch out for scams

Sadly there are scammers out there who pretend to be the IRS. They may call demanding payment right away and threaten arrest if you don’t pay. Real IRS agents won’t call out of the blue demanding money over the phone. Hang up if you get a call like this and report it.

Negotiate if you disagree

Sometimes the IRS concludes you owe more taxes then you think you should. If you disagree, don’t be afraid to make your case. Share documentation that supports your numbers. Propose a counteroffer amount if needed. Just make sure your position is reasonable.

Request a payment plan

If the audit concludes you need to pay more taxes, you can request a payment plan if needed. This lets you make smaller payments over time versus one huge lump sum. Interest accrues on unpaid tax, so keep that in mind.

Learn for next time

Think about what led to the audit – missing income, inaccurate deductions, poor records? Learn from the experience so you can avoid audits down the road. Set reminders for tax deadlines, keep better docs, report all income etc.

Dealing with a tax audit is zero fun. But staying organized, getting help, and keeping your cool can make the process smoother. The IRS just wants to make sure your return is accurate, so being cooperative can go a long way. You’ve got this!

References

Here are some helpful references I used for this article:

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