IRS audits fall into two categories: Correspondence audits, which typically just look to correct a filing error and can be handled by mail with an IRS agent; and field audits, which take place in person at your home or office and can be lengthy and feel invasive. Just 29% of all audits in 2014 were field audits, IRS data show. But, if you do wind up in the tiny percentage of Americans who will be audited this year, there are some steps you can take to smooth along the process and ensure you don't make an already stressful situation really bad for yourself.
We talked to Susan Lee, a Certified Financial Planner and tax preparer in New York City who helps clients prepare for audits, about the top things you should do if you receive an audit notice.
"The reality of an audit is that it scares people half to death," said Lee, but it's not a death sentence, so relax, don't panic and proceed to step two.
2. Address the Request ASAP
Some people may feel inclined to ignore the audit notice, at least initially, because the stress of the situation is just too much. But you should read the notice right away since you are generally required to respond to the audit request and set up an appointment.
View the most important tax dates to know:
Important tax dates to know
What to do immediately if you're audited
January 15, 2016: Those who are self-employed or have fourth-quarter income that requires payment for quarterly estimated taxes must have them postmarked by this date
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April 18, 2016: Individual tax returns are due for the 2015 tax year
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April 18, 2016: Requests for an extension on filling out your taxes must be filed by this date
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April 18, 2016: Those who are self-employed or have first-quarter income that requires payment for quarterly estimated taxes must have them postmarked by this date
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April 18, 2016: This date is also the deadline to make a contribution to an IRA account for 2015
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June 15, 2016: Those who are self-employed or have second-quarter income that requires payment for quarterly estimated taxes must have them postmarked by this date
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September 15, 2016: Those who are self-employed or have second-quarter income that requires payment for quarterly estimated taxes must have them postmarked by this date
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October 17, 2016: 2015 tax returns that received an extension are due by this date
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October 17, 2016: Today is the last chance to recharacterize a traditional IRA that was converted to a Roth IRA during 2015
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January 15, 2017: Those who are self-employed or have fourth-quarter income that requires payment for quarterly estimated taxes must have them postmarked by this date
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"If the time for responding passes, it becomes much more difficult," Lee said.
Responding to an IRS notice in a timely fashion could help minimize additional interest and penalty charges and preserve your appeal rights if you don't agree, the agency said on its website.
You're going to have to address every issue the IRS is presenting, so you'll want to go through the notice line by line.
"Most people don't really read it. They panic," Lee said. "They have to see what's going on and if they have a tax professional, get the thing over to the professional immediately."
4. Consider Hiring a Tax a Pro
If you prepared your own return, it's likely worth having a second pair of eyes to look over the audit notice.
"If they absolutely don't understand the notice, call a professional to have them review what has to be done and to coach them through it," Lee said. "It is very possible that you think you know what's needed, but you don't and you send the IRS the wrong thing or something inadequate."
5. Determine If There Really Is an Error
A tax professional can also help you spot whether an actual error was made. "There are two levels, always: Is it correct, and can you back it up," Lee said.
In other words, if you made an error or can't prove you didn't, there's no reason to fight the IRS.
6. Keep Your Attitude in Check
Whether you receive a correspondence audit or an office audit, be respectful and thorough, no matter what, Lee advised.
"Do not, under any circumstances, start venting," Lee said. "Do not discuss your negative feelings about the IRS. I've heard stories from agents about what people have said to them ... no attitude, whether it's an office audit or a correspondence audit, they're human beings. They have their troubles, they have their bad hair days just like you, except they went to work for the IRS."
RELATED: 10 of the strangest ways states tax you
10 Strangest Ways That States Tax You (or Don't)
What to do immediately if you're audited
To preserve the uniqueness of their island paradise, Hawaii since 2004 has had an "Exceptional Tree" tax allowance. Landowners can deduct up to $3,000 from their income for expenses such as pruning and fertilization for any tree designated as rare, big, old or a combination thereof. That's per tree. Top-bracket earners taxed at the state's highest rate (11 percent) would save $330 via the deduction. The work must be done by a certified arborist, and the deduction can be claimed only every third year. Hawaii has had a list of "Exceptional Trees" since 1975, and there are now estimated to be more than a thousand thus designated.
Maine legislators tax anyone who deals in their official state fruit-blueberries, at the rate of 1.5 cents per pound. The resulting revenues-more than $1.6 million to state coffers in the fiscal year that ended in June 2013-are used to promote the crop and agricultural research.
The state also taxes harvesters and processors of hard-shell clams (known in the state as mahogany quahogs) at $1.25 a bushel, but state revenues for that are much lower.
Alabama is the last in the union to tax a deck of cards as if it were a "vice," like alcohol and tobacco. Taxing decks of cards, associated with gambling, was once fairly common, but most states have since set up separate control boards to regulate liquor and tobacco, and have let the cards slide.
But in Alabama, you'll still pay a 10 cent sales tax on any pack of cards you purchase. Retailers also have to pay $2 to the state each year for the privilege of selling playing cards.
Virginia levies a 50-cent excise tax on every lamb or sheep sold in the state. Both the Maine and Virginia taxes are examples of checkoff programs that collect taxes from an industry to fund promotional campaigns for the products. National commodity checkoff programs, authorized by the U.S. Department of Agriculture, have brought you campaigns such as "Beef: It's What's for Dinner" and "Got Milk?" But the Virginia program is extremely modest by comparison, having collected only $9,000 in fiscal year 2013. The funds go to the Virginia Sheep Industry Board, which spends them largely on predator control.
In 2013, in part to meet federal pollution-control mandates, Maryland legislators enacted fees on property owners in Baltimore and nine other Maryland counties, aimed at curbing storm water runoff. The fees were meant to fund programs to improve the water quality of the Chesapeake Bay, the largest marine estuary in the U.S. Sounds simple enough, but the way Maryland legislators wrote the law has led to an angry backlash in some corners against this so-called “rain tax.” One way localities calculate the tax is by measuring how much of a landowner’s tract is "impervious" to precipitation seeping into the ground. So the more you've developed it with buildings, driveways, tennis courts and the like, the less it will absorb and the more you pay. That's how the tax is being implemented (through aerial and satellite photos) in Montgomery County, a heavily developed suburb of Washington, and many landowners are up in arms. New Maryland Gov. Larry Hogan, a Republican, campaigned against this tax in his winning 2014 campaign and has introduced legislation to repeal it, though it’s not clear that will fly with Democratic state legislators. Money still needs to be raised to satisfy the federal pollution mandates, but the methods may change.
Kansas is among a bevy of jurisdictions that allows sale of lower-alcohol beer (the term of art is “cereal malt beverage”) in convenience and grocery stores. But Kansas also taxes “3.2” beer differently -- and there lies the rub. At a liquor store, all products, including, say, a conventional six-pack of Budweiser (with 5 percent alcohol by volume), are taxed at a special rate of 8 percent. At the convenience store down the street, however, ordinary sales tax is levied on the lower-alcohol, cereal malt beverage bottle of Bud. That often ends up being more than the 8 percent alcohol tax. In Pomona, Kansas, for example, the effective rate on the weaker beer would be 9.7 percent. Go figure.
When it comes to taxation, the rule is generally the stronger the booze, the higher the tax (that's why Kansas's beer tax scheme is an anomaly). California follows that curve, but at 100 proof, you better be ready to pay through the nose. Distilled spirits are taxed at $3.30 a gallon if below 100 proof, or 50 percent alcohol. Go over that, like with Bacardi 151, and the tax doubles to $6.60. Maryland also notes the 100 proof point, but it only adds 1.5 cents per proof, per gallon to the relatively modest liquor tax of $1.50 per gallon, taking the Bacardi 151 to $2.27 per gallon.
Entertainment venues pay a business tax to Nevada ranging from 5 percent to 10 percent on admissions fees (and food, drink and merchandise sales) whenever there’s live entertainment going on. There are exemptions, however, including this one, for businesses that provide "instrumental or vocal music, which may or may not be supplemented with commentary by the musicians, in a restaurant, lounge or similar area if such music does not routinely rise to the volume that interferes with casual conversation and if such music would not generally cause patrons to watch as well as listen." So your piano player can play “Feelings” softly and even crack a few jokes, tax-free, for your business. Just make sure they're not funny enough to attract attention.
Want to own a plush or fuel-thirsty ride? That’ll cost you extra in New Jersey. Cars that cost $45,000 or more or have a combined EPA fuel-mileage average of 19 or below pay an additional 0.4 percent on top of New Jersey’s 7 percent sales tax.
In New Mexico, making it to 100 years has a payoff beyond the chance that Willard Scott will wish you a happy birthday: You don’t have to pay state income tax anymore. If you’ve been physically present in the state for at least six months and a resident of the state on the last day of the year, and you’re not someone’s dependent, you’re eligible. You’ll still need to file, and there are some complications if you’re married and your spouse doesn’t qualify.
If you plan on claiming one of the IRS educational tax credits, be sure to fill out a Form 8863 and attach it to your tax return. These credits can provide a dollar-for-dollar reduction in the amount of tax you owe at the end of the year for the costs you incur to attend school. Before preparing the form, however, make sure that you satisfy the requirements of an eligible student.
Virtual currency like Bitcoin has shifted into the public eye in recent years. Some employees are paid with Bitcoin, more than a few retailers accept Bitcoin as payment, and others hold the e-currency as a capital asset. Recently, the Internal Revenue Service (IRS) clarified the tax treatment of Bitcoin and Bitcoin transactions.