It's the envelope no taxpayer wants to open: an IRS audit notice.
What should you do if one arrives? Curl into the fetal position? Run? Freak out?
"Don't panic," advises Bob Meighan, vice president of online tax preparation service TurboTax®. "The vast majority are correspondence audits. That means the IRS sends a letter and says the income from Bank XYZ does not match what was reported to us."
Those low-level inquiries account for 80 percent of audits. But you should take the notice seriously, Meighan says. Respond within the allotted time frame with the information requested.
The next level is the audit where an agent looks at a specific return and questions items. These audits tend to focus on taxpayers with higher incomes. Triggers tend to include travel and entertainment expenses, home office expenses and high donation amounts.
Remember the IRS only audits about 1 percent of returns, Meighan says. Freelancers and "self-employed taxpayers" take note, however: For you, that likelihood nudges up to about 3 percent.
While the IRS does some random audits, in part to validate its own statistics and determine the accuracy rate of returns, it tends to select those returns based on the opportunity to collect revenue, Meighan says.
"If people are honest in filing returns, there's really nothing to worry about, provided you keep good records and documentation," he adds.
The statute of limitations for an IRS audit is generally three years, unless there is fraud involved.
If you have questions about the audit process or otherwise need advice, Meighan recommends getting representation from a tax professional, such as a tax attorney who practices in the field. Some states have attorneys who are board certified in tax law. That expert can help you understand your rights and help ensure the IRS stays within the proper scope of the audit. During that process, your attorney can also provide you with legal counsel.
If you feel a case was mishandled or the facts don't support it, you can contact the IRS Taxpayer Advocate Service.