Goals During an IRS Audit

IRS Audits aren’t ever fun but they are survivable. There should be two goals in surviving an audit and they should be kept in mind during any audit. These goals can help minimize the financial fallout and limit the scope of the IRS audit. Here’s what to do:

1. To minimize financial damage

Accept the over 80% chance that your audit will end with a tax bill. Aim for damage control—keeping your tab as low as possible. I’m not saying to go in with a defeatist attitude, but at the same time don’t have unrealistic expectations. In a recent year, audits resulted in additional taxes and penalties of $19 billion owed to the IRS, and only about $600 million in refunds—a ratio of 32 to 1 against taxpayers.

2. To prevent expansion

One way to minimize the financial damage (your first goal) is to prevent an expansion of the audit. An auditor can examine any open tax year if such an examination is likely to be fruitful—that is, result in more money owed. Open tax years are those for tax returns filed within the past three years. The limit is extended to six years if the IRS believes you are guilty of underreporting your income by 25% or more, or forever if you are suspected of outright fraud.

Expansion most frequently occurs when during the audit, the auditor sees something such as an improper deduction that might be present on tax returns other than the one under audit. You might hang yourself by showing the auditor something related to an open tax year.