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If your return is selected for a closer look, don't panic and don't ignore IRS inquiries.
If you're in the audit majority, you'll fall into the least intrusive category, the correspondence audit. This is the easiest process for both the taxpayer and the IRS. In this case, the IRS sends the taxpayer a letter asking for more information about one or two relatively simple items.
"Just because you get a correspondence audit letter, there's no need to panic," says Nath. "In fact, if you get a letter instead of a call, that indicates the IRS views the inquiry as not particularly earth shattering."
Once you provide the requested information, the case usually is closed. If not, you'll get another letter describing the additional taxes to be paid.
If questions about your tax return are more serious, you'll be asked to meet with an examiner at an IRS district office near your home. These agents generally have more training and experience with complex returns. Bring only the documentation needed to answer the IRS' specific questions, but don't bring or volunteer other data unless you want to open up those records to examination, too.
Finally, there's the field audit. This investigation is done at the taxpayer's home or business and is more wide-ranging. Wealthy taxpayers and businesses are generally the target of a field audit, which gives agents a chance to conduct a "lifestyle" audit. Here an IRS agent gets an up-close-and-personal look at a taxpayer's house, neighborhood, car and everything else on hand to see if it meshes with the return's stated income. If a taxpayer has a new Jaguar parked in the garage of a six-bedroom house and reports income of $40,000 a year, he likely will have some explaining to do.
When you get a notice of any type of audit, respond immediately. After you've acknowledged the audit notification, you usually can get a postponement if you need time to gather records. And it's never too late -- even after the audit begins -- to get professional help, such as a tax attorney, certified public accountant or Enrolled Agent.
"You have rights to contest audits," Nath notes, "at every level of the process."
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