Should I be worried about an upcoming IRS audit?

September 22, 2006 7:27 AM

I have an audit meeting with the IRS coming up. What can I/should I expect?

Back in 2004, we had flooding in our area. We had at least a foot of standing water at one point then mold started to grow. We applied for aid and we ended up being able to get a low interest small business loan through the goverment, which we are paying back right now. We still have all of our receipts and paperwork from that time, but the idea that the IRS wants another look at everything seems a bit odd.

Should I be worried or is something like this procedural?

posted by jasonspaceman to law & government (9 comments total)

With all of the recent fraudulent spending around Katrina, I'd not be surprised to hear that they're stepping up their efforts on making sure government money (even loans, which you are paying back) was used properly by individuals.
posted by beaucoupkevin at 7:48 AM on September 22, 2006

Don't worry, be happy.

Really, just consider it a competence test by the government, sort of an added cost to keep you from applying for another loan.
posted by dragonsi55 at 8:05 AM on September 22, 2006

gut reaction: you are talking to professionals, bring a professional. you might just end up saying something that might get you into trouble without knowing you did it until it's too late. I'd be cautious, even when it' nothing.
posted by krautland at 8:15 AM on September 22, 2006

Aah, krautland probably has a good point, even though it is probably just procedural. But don't worry, if you have all the paperwork you should be okay.
posted by dragonsi55 at 9:20 AM on September 22, 2006

Think about all the real baddies and incompetents you know about. Where would you put yourself on that scale? If it is near the "goodie" end, stop worrying.
posted by Idcoytco at 10:41 AM on September 22, 2006

I have heard that it's unwise to take anything with you. Go and find out what they want, and make a date to come back with it later. Be friendly and curteous, and above all, stroke their petty tyrant egos and sympathize with their difficult jobs. Present an image of honesty and openness.

If you take everything you have, you just have a fishing expedition set up for them. They'll find something, just to justify their jobs.

If they have a problem with a specific line item, bring them back the proof. Repeat until they get tired or satisfied.

If it ain't a zillion bux, at some point they'll cut their losses. If you used a paid provider of tax prep services, I'd hold off on using them until the last minute, especially if you have to pay for them. Narrow the scope of the work THEY have to do on your behalf. If it's H&R Block, that's different. Take them with you, but no paperwork!

I've never been audited, but I did get a $50,000 IRS penalty assessment forgiven.
posted by FauxScot at 10:51 AM on September 22, 2006

Former IRS Tax Examiner here, I was not an auditor, but I frequently did send cases to the Examination Branch. The advice given/opinion here is my own, and this is no substitute for professional tax advice. I just like helping taxpayers, and I believe that taxpayers dealing with the IRS deserve straight answers, and deserve to be treated fairly.

Based on your question, it appears that the audit is due to information on your Tax Year 2004 return relating to the flood in your area. It is likely that you have received correspondence from the IRS regarding this matter. It would be helpful if you would post the type of notice you received (a code like CP-XX on the top right-hand side of your correspondence), and some text from the correspondence (like "Your Form 1040 for the tax period ending December 31st, 2004 has been selected for examination due to this reason." But I'll work with what is here.

I can think of four possible reasons why you are being audited:

1. For whatever reason(s), the DIF score of your tax return flagged it for an audit.

2. Your return was selected for an audit at random. When I worked at the IRS many years ago, I was told that 2% of taxpayer returns were randomly audited each year. This may no longer be true.

3. There have been possible instances of fraud in the tax returns filed by taxpayers in your area that were also affected by this flood. A "Special Project" may have initiated in which tax returns of many taxpayers affected by this flood are audited. Yours may be one of them.

4. You never said this in your original post, but I speculate that you have Casualty, Disaster, and Theft losses listed on your return due to the foot of standing water and mold damage. It is possible that a certain dollar amount in losses might trigger an audit.

In my opinion, none of these reasons are particularly odd, and this audit is likely procedural. I also feel that any taxpayer being audited should be concerned, but not worried about an audit.

It is not clear from your post whether or not you are having some kind of face to face with an auditor, or whether the IRS has requested some additional information about your Tax Year 2004 return. If you could elaborate, that might prove useful.
posted by Fat Guy at 11:53 AM on September 22, 2006 [2 favorites has favorites]

My husband's return was thoroughly audited five years ago. He hadn't done anything wrong or iffy, but he was in a catagory of taxpayers who are likely to cheat. Since then, he's gotten two more audit notifications. These things just get generated automatically under certain conditions. (Thoise audits were canceled when he called the IRS and told a human about the earlier audit.)

After the auditor had gone through every line of our return and every piece of supporting evidence -- and found nothing amiss-- we asked him what the deal was. He said that a lot of audits are done on the basis of which deductions were taken and what kind of income is reported, not on particular information the taxpayer does or doesn't provide with he return. There is no assumption of wrongdoing in the individual case.

He said it's normal that the first meeting just serve to give you a clear idea of what materials you need to provide. You can go to that and then decide whether you want an accountant to handle your audit.
posted by wryly at 1:08 PM on September 22, 2006

I agree with Fauxscot. If they have not specifically asked for anything, come empty handed but for a notebook to take notes on what they want at the second meeting. This will give you time to prepare. If they asked for specific info, bring ONLY what relates to that request. No more, no less. If they ask you something that you are not comfortable asking do not be afraid to say, "I am not prepared to answer that, but I will get you that information." Or, "I need to look at my prep docs which are not with me to answer that." I would bring a copy of the 2004 1040 to refer to so that you do not contradict anything you originally wrote.
posted by JohnnyGunn at 1:14 PM on September 22, 2006