RTS #072 So the other day I’m talking to IRS auditors…

Every tax return that gets filed has a chance to be selected for audit. While the chances of getting picked are incredibly low (especially if you aren’t participating in shenanigans), you should approach any tax return fully expecting it could be picked. And if you work around enough tax returns, eventually, at least one will.

My most recent experience with a tax return I prepared getting audited was this last week. It was a return from almost two years ago, and as far as we know, it was picked at random (this IRS does have “red flags” that can increase the chance of an audit, but there isn’t reliable or consistent data on what those are). If you’re not familiar with the process, here’s a quick overview of what happened for this client:

• They were notified of the year that had been selected for audit and were instructed to call the IRS.
• On that call (which I was not on) they verified some basic information and scheduled an appointment for an interview to be conducted for the audit, and were told they would receive a more detailed list of the areas of focus.
• A letter was sent specifically indicating that the IRS had questions about their rental property that was sold in the year under audit, and in particular, they needed to provide support for their depreciation calculations, repairs and maintenance, and total rental income.
• Then they participated in an in-person interview with an IRS agent and their supervisor to go through the letter and conduct the interview.

I participated in the meeting with the IRS agents, which ultimately ended with no adjustments to the tax return, but there were several great reminders that came out of that meeting for me:

• Documentation is key – having clear evidence is the fastest way to resolve IRS questions. Keep good records; only claim things that can be supported.
• IRS agents are people too – that might sound silly, but it’s easy to talk about the IRS as a nebulous construct and forget that there are still real people running the day-to-day and those people have nothing to do with creating the rules; they’re just trying to do the best they can.
• The tax code is the same 80,000 pages long for IRS agents – again, that might sound obvious, but it’s helpful to remember before you jump all over someone for not knowing every nuance of the tax code by memory (we spent a large portion of the interview educating the agents on how backdoor Roth contributions work, neither of them had ever heard of it).
• You gain nothing by being anything but friendly and respectful – taxes are frustrating, to begin with, and even more so when you get picked for an audit having done nothing wrong. Remember that IRS agents likely get more than their fair share of verbal abuse, and a kind word and a smile will go a long way.

I never volunteer for more IRS scrutiny because it doesn’t seem like the best use of anyone’s time, but I prepare every tax return assuming I could one day sit across from an IRS agent and need to explain why we did what we did with a straight face. That’s what I recommend to all of my clients, and that’s what I’ve seen create positive outcomes time and again.

Pay every penny you owe, but there are no patriotic awards for tipping the IRS! (just keep the receipts)

Happy Tax Planning!