Tips for preparing for a tax audit in California

To prepare for an audit, taxpayers should gather records, know what type of audit to expect, remain aware of IRS deadlines and consider seeking legal help.

To many people in Los Angeles, the likelihood of being audited may seem fairly low. According to Forbes, in the fiscal year that ended in September 2012, the Internal Revenue Service audited about 1 percent of individual tax returns and 1.6 percent of corporate returns. However, for higher-income taxpayers, the risk of an audit is greater. In the same fiscal year, the IRS audited 12.1 percent of people with income over $1 million and 17.2 percent of corporations with assets worth over $10 million.

The consequences of an individual tax audit or a business tax audit can be severe. If the IRS finds that a person understated his or her liability or disregarded IRS rules, it may assess penalties of up to 20 percent of the misstated amount. If a return is deemed fraudulent, the IRS may levy a fine of 75 percent of the unpaid amount. Given these serious potential outcomes, it is crucial for most people to understand how to prepare for an audit.

Know what to expect

After receiving notice of an audit, taxpayers should find out which return will be audited and what type of audit will be conducted. Fox News explains that the IRS performs random audits as well as three types of deliberate audit, which vary as follows:

  • Correspondence audits - during these audits, the IRS requests more information or documentation to support a return. These audits are typically conducted entirely via mail.
  • Office audits - these audits, which are conducted at an IRS office, are more detailed and may require more extensive documentation.
  • Field audits - these are the most intensive audits, and they are performed at a taxpayer's home or business.

An audit may focus on an entire return or only one element of it. The amount of time that taxpayers need to spend preparing for an audit depends on its scope as well as its seriousness.

Gather documentation

After assessing the nature of the audit, taxpayers should gather documentation to support the position that they took in the tax return. According to Fox News, if the necessary documents have been disposed of or lost, taxpayers should reach out to third parties who may have relevant records. For example, a person who faces a business tax audit may be able to use documentation from vendors and contractors to provide proof of any business expenses that were deducted in a tax return.

Respond promptly

The IRS always provides a deadline for a response when giving notice of an audit. It is critical to respond within this timeframe instead of ignoring the approaching audit. At the same time, taxpayers should take as much time as necessary to gather documentation and get ready for the audit, rather than feeling obligated to rush into the process unprepared.

Seek representation

In many cases, taxpayers who face audits may benefit from seeking the advice of a tax lawyer. This is especially true if necessary documentation is lacking or if there are other potential issues with the position taken in a tax return. A lawyer may be able to help a person understand his or her rights throughout the audit and negotiate to resolve any disputed items.