Very few things in this world have the effect of bringing the most hardened people to their knees the way notification of an IRS Audit can. The letter from the IRS notifying a taxpayer that he or she has been selected for an audit contains language that is far from threatening, yet it strikes terror in the heart of most recipients. Various survival tactics can be used in preparing to do battle at the IRS audit. All of them are legal, but some aren't very nice.

TYPES OF AUDITS:

1. Correspondence Audit: Some IRS audits are more thorough than others. The least thorough is a correspondence audit. Here, the IRS seeks to test compliance with perhaps one item on either a regional or national basis. For example, the IRS may send out hundreds of letters asking for verification of energy credit expenditures. On receipt of this notice, all you have to do is mail in the appropriate documentation to support your deduction.

Technically, this inquiry constitutes an audit. Once it takes place, there is very little change that the rest of your return for that particular tax year will ever be audited. If the IRS should decide it wants to audit your return at later date, it must go through a formal "Reopening Procedure" - which is rarely done. The obvious advantage of the correspondence audit is that if the IRS does not select an area in which you may be vulnerable, it will never know that it could have made other adjustments to your return that might have resulted in more tax.

2. Office Audit: The next level of audit is the Office Audit. This examination is handled at a local IRS office. Typically, one or two deductions on your return will be questioned. Absent special circumstances, such as suspicion of fraud or gross errors in other areas of the return, the audit will not be extended to other issues. The primary advantage of the Office Audit is that it is generally conducted by individuals who lack the sophistication in tax matters needed to recognize more significant issues. The training and method of operation at the Office Audit level consists of telling the examiner (called a Tax Auditor) exactly what to look for a given issue. The audit will be conducted mechanically and "by-the-book."

3. Field Audits: These are conducted by the best educated employees at the IRS, knows as Revenue Agents. They are usually assigned the tax returns of businesses and wealthy individuals. An audit conducted by a Revenue Agent is usually quite complete, and although it will not examine every item in depth, it will attempt to cover many areas. One of the jobs of the Revenue Agent is to identify promptly areas with the potential for extra tax dollars and then to spend time developing the tax issues.

The chances of having the IRS uncover unreported income or disallowing deductions that are either personal or otherwise not deductible are more likely at Field Audit than at any other type of IRS examination. It's unwise to try to handle a Field Audit yourself because the potential adverse ramifications can be severe -event if you think you did everything right! A sharp Revenue Agent can be quite creative when it comes to interpreting the Internal Revenue Code in the government's favor. Your ability to survive such creativity is enhanced by having an experienced practitioner representing your interest.

4. TCMP Audit: The most encompassing type of IRS audit is the TCMP Audit. TCMP stands for Taxpayer-Compliance-Measurement-Program. TCMP audits are conducted to gain a statistical sample of the kinds of adjustments that are being uncovered. (For example, are adjustments of medical deductions on returns with an adjusted gross income of $100,000 or more?). The results of these audits are used to reprogram the IRS computers so that in the future they can select those returns most likely to result in additional tax dollars.

TCMP audits are usually conducted by Revenue Agent. The biggest problem with these examinations is that the Agents is required to comment on every item appearing on the tax return, starting with the spelling of your name. This does not mean that every line is audited, but the audits is lengthy and there is greater risk that adjustment will be found that will cost you a lot of money. One of the required audit techniques is the analysis of all a taxpayer's bank account for possible monies that were deposited but not reported.

5. Criminal Investigations: These investigations, conducted by IRS employees knows as Special Agent, are the most threatening to your personal liberty.
The job of the Special Agent is to gather evidence of the commission of a tax crime. The least serious penalty that may result from a criminal investigation is the payment of some extra tax.

The most serious penalty is indictment, conviction and a jail sentence. The anxiety created by a criminal investigation can be overwhelming. In most cases the subject of the investigation is not a "crook" or "Mafia" character. It is likely to be a professional or successful small business-people who got carried away rationalizing that some of the money received during the year wasn't really income or, if it was income, that nobody would ever find out if it wasn't reported.

The IRS gains tremendous publicity when a local person is convicted of tax evasion. As a result of an indictment or a conviction, the IRS assures itself that the level of voluntary compliance increases.

AUDIT SURVIVAL TACTICS:

Knowing how the system at the IRS works gives you an advantage when it comes at an audit. Here are some truly "inside" things that go on.

Postponing Appointments:
It's possible, though not likely, that the IRS will actually change its mind about auditing you if you have postponed the appointment enough times. The IRS is constantly under pressure to start and finish tax examinations. If the return selected for an audit becomes "OLD" (i.e. more than two years have passed since the return was filed), the IRS may not want to start the audit. This situation may develop if you are notified of an audit about 15 or 16 month after filing. By the time you have canceled one or two appointments, the 24-month cut-off period may have been reached.

When is the best time to cancel? The day before the appointment. By that time, the next available appointment will probably not be for 6 to 8 weeks.

Best Time To Schedule An Audit:
To someone uninitiated, it may seem ridiculous that one time of the day or month is better than another to have your tax return audited. However, a real advantage can be gained by following some simple tips. Try to schedule an audit before a three-day weekend. The auditor may be less interested in the audit and more interested in the holiday. Another excellent time is at the end of the month. If an auditor has not "closed" enough cases that month, he or she may be inclined to go easy on you to gain a quick agreement and another closed case. As for the best time of the day, most pros like to start an audit at about 10 o'clock in the morning. By the time it comes to discussing adjustments with the auditor, it will be close to lunch time. If you are persistent, the auditor may be willing to make concessions just to get rid of you so as not to interfere with lunch plans.

Audit Tips From A Former IRS Agent:
Good records are the key to success. They should be as complete as possible. But that does not mean that you should concede an issue if the paperwork is not perfect. Under the so-called Cohen rule, you are allowed to use approximations in determining deductible expenses. KEY: You must establish that you did legitimately incur deductible expenses and that your records are incomplete or unavailable. Of course, many agents are not candid about the Cohen rule and will try to disallow some or all of your expenses. Don't accept a disallowance you think should be reasonably allowed. Caution: The Cohen rule does not apply to expenses for overnight travel, business entertainment or gifts. These must be fully documented to sustain a deduction.

Knowing Your Rights:
The first big change is that the IRS actually has to describe your rights in writing at the beginning of an audit or other interview. In the past, many people thought they had to talk to the IRS and did not know they could refuse to say anything or turn over evidence. The IRS plans to give everyone a copy of Publication 1,"Your Rights as A Taxpayer," to meet the requirement. The publication explains both the audit and collection processes and what your rights are during each process.

Audits and interviews:
The new legislation also makes clear that you can be represented at an IRS proceeding by anyone who is qualified to represent taxpayers before the IRS. This means attorneys, CPAs, and enrolled agents. In fact, you are allowed to seek representative at any time, and the IRS is required to suspend an interview if you so request to allow you to consult with your representative.

Most importantly, in most cases you do not have to appear at an audit. That had been the IRS's longstanding policy. But a few year ago the IRS tried to change the policy, particularly when business taxpayers were involved. The IRS manual told agents that taxpayers were likely to make misstatement and other mistakes at an initial interview, so taxpayers should be told to attend the initial meeting themselves even if a representative would be handling most of the audit. The IRS changed this policy under pressure from tax practitioners, and Congress codified the change. You do not have to appear personally at an audit if you send a representative who is qualified to practice before the IRS.