Opening up a letter from the IRS can make anyone's heart thump. After all, more than 75 percent of all taxpayers who are audited by the IRS end up paying additional taxes.
Not every notice or letter from the IRS is a demand for money. Some seek to verify your identity or to notify you of a delay in processing your return. Watch out for notices or letters that say you owe taxes, that the IRS has changed your return, or that the agency has a question or requires additional information about your return. Those are the ones that bring on audit headaches.
First step: Read the notice carefully and look for a response due date
An IRS letter or notice contains a lot of useful information, but the first thing you'll want to look for is the deadline for responding. If you disagree with the IRS's calculations, it's important to respond by that date in order to preserve your appeal rights and to limit additional interest and penalties.
If you don't understand what the IRS is asking, or if the agency says you owe a substantial amount of money, contact a tax lawyer right away. Don't put off having a persuasive response prepared -- often, IRS questions can be completely resolved by mail.
Next step: Gather the evidence needed to prepare a strong argument
If you can't resolve the issue by mail, the IRS may request an in-person examination of your tax return. Gather all the paperwork, receipts and other evidence related to any large deductions or other questionable entries. Don't rush through this. Ask for a postponement if you need one.
Explain to your tax attorney exactly what you did, whether it was legitimate, mistaken or fishy. Lawyer-client privilege allows you to be completely honest, so your attorney will know whether to defend your actions, file an amended return, or negotiate with the IRS for the lowest possible penalty.
When the time for the audit arrives, let your attorney do the talking or, if your attorney is not allowed to attend, ask for a recess when you need a consultation. An audit is not a good time to volunteer information or hand over documents the auditor has not requested.
Take a deep breath. You can handle an IRS audit. You can even minimize the penalties and interest on any delinquent tax you owe. You just need to get organized -- and get the right help.