Facing an audit? Read this before you panic

What to do when the IRS writes

It's the subject of jokes, nightmares, and many a congressional hearing: the dreaded audit letter from the Internal Revenue Service (IRS). But according to two accountants who work with medical practices, most issues raised by the IRS are easily handled by an accountant, and even the more complex issues shouldn't cause you to lose too much sleep.

Here's a list of 10 things that can get you through the initial panic:

1. Know what you are facing.

One of the first mistakes that people make when they get correspondence from the IRS is to assume it's an audit notice, says Brent Thomas, CPA, partner with Thomas Doll & Associates, a Walnut Creek, CA-based accounting firm that deals exclusively with health care organizations.

"Some of what they send out even says, 'No action required,' but people panic and make assumptions," he says. "Sometimes, they just want to make sure of your address or the name of your entity."

Robert Alexander, CPA, ABV, CVA, an accountant with the Horne CPA Group in Jackson, MI, says that only a fraction of the correspondence sent out by the IRS is an audit notice.

2. Confirm any appointments.

Even if your preparer will handle any dealings with the IRS, Alexander says if there is an appointment scheduled in your letter, call to confirm it or call to say that your preparer will be calling to confirm or change any appointment.

3. Call your tax preparer.

Thomas says you should immediately let the person who prepared your tax return know about the letter and fax him or her a copy. Get any thoughts on what the letter means.

If you have prepared your return yourself, you may want to call a CPA now, he adds. "You could call a tax attorney, but they are more expensive. They also tend to raise the eyebrows of auditors, who figure you have something to hide if you have contacted an attorney." The exception, says Thomas, is if you suspect or know that there is something fishy in your returns that could cause legal problems.

Alexander underscores the need for a professional to be involved. "There is a lot of personality involved in an audit," he says. "Find someone with experience with the IRS and spend the money. It could help in the end."The most important thing is to get help before the audit, not after, says Thomas. If you try to go in yourself, you may end up in a longer, more arduous process that results in a big tax bill. The experience of an accountant in an audit situation usually keeps auditors from pinning too much on a practice.

4. Provide a power of attorney.

The next step, says Thomas, is to give your tax preparer power of attorney so that he or she can speak with the IRS on your behalf. "Sometimes, you can resolve the issue over the phone with a written follow-up," he notes. "Having power of attorney lets me get this over with faster."

5. Provide appropriate documentation.

If your CPA asks for a document, get it, says Thomas. "Getting the IRS what they request in a timely manner is my usual strategy. Of course, there are others who figure if you bury them in paper, wasting their time, they'll give up on the audit. But I think that being cooperative is a better way to go."

You also don't want to give your attorney a box full of receipts. Try to be organized, Thomas advises. And think ahead. The IRS doesn't just want the cancelled check for an item; they want to see the bill itself. When they ask for information, try to provide them with more than what they want.

6. Get educated.

You can find out more about the specific issues you are being audited on by going to the IRS Web site (www.irs.gov) or by going to your local IRS office for publications. Knowing what the agency is looking for, says Thomas, is one of the best ways to assist your accountant and stave off any big penalties.

7. Don't insist on being there.

Thomas almost always tells his clients to stay at home during the audit. His long experience makes the audit process go faster, he is less likely to be trod upon by an over-zealous auditor, and you are less likely to blurt out something that will make the audit take off in a direction it otherwise would not have gone.

8. Be nice.

"You get more mileage from being polite and assisting with their requests than you do losing your cool," says Thomas. That is yet another reason why he doesn't like clients coming with him to audit meetings.

9. Be prepared for a long process.

Alexander says that it can take anywhere from six months to two years to resolve issues, depending on what the IRS is looking for. Even if you resolve the initial issue, chances are during the process the agency will find another item or two to ask about. "But the average audit, even if it takes time, doesn't result in penalties being assessed. You may have to pay interest, but penalties usually only occur in cases of gross understatement."

Thomas agrees. "Most audits result in clients paying more money, but we don't usually see big checks being written in the end."

10. Don't ignore it.

Thomas' last piece of advice could also be the first, but he says it as a reminder: Don't assume that if you bury the audit letter, the IRS will go away. "It will still be there the next day," he says. "Better to get it over with."

· Brent Thomas, CPA, Partner, Thomas Doll & Associates, Walnut Creek, CA. Telephone: (800) 877-0564.

· Robert Alexander, CPA, CVA, ABV, Horne CPA Group, Jackson, MI. Telephone: (601) 948-0940.