Audit Checklist: 4 Steps to Take if You’re Tapped by the IRS

By Brendan Hughes0 Comments

Enlisting in the services of a tax professional or a voodoo practitioner will not guarantee lifelong freedom from being on the receiving end of an IRS tax audit.

As an Equity Trust client, you know we ask for an internal form detailing the movement of IRA funds and supporting documentation for each request.  Failing to be able to show that your self-directed IRA funds were used according to the IRS’ strict guidelines can result in the account losing its status as an IRA.  The tax and penalty fallout from this event has the potential to be catastrophic.     

As U.S. Supreme Court Justice Louis Brandeis stated in a 1913 Harper’s Weekly article, “…sunlight is said to be the best of disinfectants,” if you prefer your tax advisors to be bluntly honest don’t be surprised to hear the assumption is every return will be audited and to prepare your filing accordingly.    

Be correct.  Be complete.  Be honest.  Can every line item stand up under the full light of day?  What about the way you are managing your self-directed IRA assets and funds?

Even with every “i” dotted and “t” crossed, your number can come up. Here’s a start on what you need to do to prepare for a tax audit.   
  • Stay calm and read the IRS letter carefully.  There are many reasons a tax return can trigger an audit and a simple discrepancy is one of them.  The letter will identify what items are being questioned and what specific documents you need to produce. 
  • Take the response deadline seriously.  30 days is the typical timeframe a taxpayer has to respond to the letter.  Ignoring the letter is not in your best interest, as this issue will stay with you until it is resolved.  If money owed is part of the matter, interest is going to accrue on the debt until everything is handled.
  • Enlist in the aid of a qualified tax professional.  Before you respond to the letter, you want to strongly consider reaching out to a CPA, attorney, or other professional for guidance.  Remember, you have the right to representation in an audit by an enrolled agent, an unenrolled preparer who prepared the return, an attorney or a CPA.  If the audit is in-person instead of being conducted solely through the mail, this person can go with you to the audit or even appear in your place. 
  • Locate and gather the requested documentation as soon as you can.  Ideally, you’ve kept good records of all the receipts, income and expense statements, mileage logs, tax forms and other paperwork used to prepare your tax return and can quickly lay your hands on these items.  If you find you’re missing something and need to get duplicates reissued, you’ll be happy you started taking care of this issue early in the 30-day countdown instead of at the 11th hour.             
For more tips on handling an audit, check out this article from Entrepreneur.