While most taxpayers don't get audited, if you're in the minority that the IRS selects for further examination, you'll want to know how to prepare and how to handle the process.

TUTORIAL: Personal Income Tax Guide

Don't Panic
If you intentionally cheated on your taxes, then a little panicking may be in order, and you should almost certainly hire a tax attorney to represent you. However, many people who are audited will have either made clerical errors or honest mistakes that can be easily resolved. If you aren't tax savvy, don't understand your audit notice or simply want experienced help, you can hire a tax professional - a CPA, an enrolled agent or a tax attorney - to help you through the process.

Prepare Yourself Mentally and Financially
Unfortunately, if the IRS selects you for an audit, it's because they think they can get additional money out of you. Until the audit process is complete - which may take months - you won't know if you owe anything or how much it will be. In a best-case scenario, it will turn out that you completed your return correctly in the first place or that there was an error in your favor. But in case things don't work out so well, think about where you will get the cash to pay any balance that you might end up owing. If money is tight, you may be able to work out a payment plan with the IRS. (See Top 9 Solutions To An Unexpected Tax Bill for additional information.)

Decide How to Respond
Understand why you are being audited and what type of audit the IRS is subjecting you to - is it a correspondence audit, an office audit or a field audit? Correspondence audits require you to reply by mail with requested documentation. Taxpayers may be able to handle this type of audit on their own. Office audits require taxpayers to visit an IRS office for an in-person discussion, and field audits send an IRS official to your home or business. These two types of audits involve a higher level of scrutiny and present more opportunities for taxpayers to accidentally incriminate themselves. Taxpayers who find themselves in one of these two situations should strongly consider hiring professional help.

If the audit is over a small matter and you want to handle the process yourself, one simple and inexpensive way to prepare is to read a book or two about IRS audits. A good place to start is the NOLO series, a respectable collection of books on tax and financial matters. The company's titles include "Keep the Tax Collector at Bay," "Stand Up to the IRS" and "Surviving an IRS Tax Audit."

TUTORIAL: How To Manage Credit And Debt

Gather Your Tax Records
The IRS requires that taxpayers be able to substantiate the data on their returns. Ideally, you would have gathered all these records before you actually filed your tax return, but if you didn't, now is the time to track them down. You'll want to have copies of your bank statements, W-2s, 1099s, proof of donations you made and any other paperwork that supports the numbers on your tax return. If you gathered your records before filing, double check them for completeness and accuracy. You may need your returns and supporting documentation from the last three years (or longer in cases of suspected tax fraud).

However, though you will want to have a complete set of records, you should not give the IRS any information that it doesn't specifically ask for. You only want to substantiate the items they have specifically questioned. (To learn more, read Surviving The IRS Audit.)

The Bottom Line
If you don't agree with the results of the audit, you can appeal the IRS's decision. IRS appeals officers can change an auditor's findings, which may reduce or eliminate any additional taxes, interest and penalties the auditor determines that you owe. The appeals process is free, and you can do it yourself without hiring a tax professional. You can also take the IRS to tax court. (For further reading, see How To Appeal Your IRS Audit.)

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