How to survive an audit

Apr 9, 2015

Need help dealing with a legal issue? Download the Freelancers Union app to connect with a lawyer committed to helping freelancers and who understand the freelance life.

Protect your work: Build a standardized client agreement with our step-by-step freelance contract creator.

Even for the most meticulous of freelancers, a tax audit is just plain unpleasant. If you received an audit notice this year, you may be wondering how the process will go and how to avoid a fine.

To help you survive the experience, here’s our best advice on how to navigate a tax audit.

Understand what you’re up against

There are three basic types of audits: the correspondence audit, the field audit, and the office audit.

Correspondence audit

For a correspondence audit, the IRS will send you a letter outlining any issues they have with your return. You can probably solve this type of audit on your own as you will likely just need to send a letter confirming the requested details.

The IRS may require you to pay additional taxes on any unreported income, but it’s unlikely that you’ll have to pay a penalty.

Field audits and office audits

Field and office audits are more involved. During a field audit, an IRS agent comes to your business to examine your records. During an office audit, you bring your records to the IRS office for the examination.

In either case, you will need to provide documentation that supports any items in question outlined in your initial letter from the IRS.

Because field and office audits can be more complex (and intimidating), it’s a good idea to hire a professional.

Bring in the big guns

If the scope of the audit seems over your head (or more than you’re willing to deal with), it’s best to hire a representative. There are only three types of financial professionals who can legally represent you during an audit: Certified Public Accountants (CPAs), Tax Attorneys, and Enrolled Agents.

There are different advantages to working with each:

Certified Public Accountant (CPA)

If you already work with a CPA, they’re probably your best bet for the audit. They’ll have a deeper understanding of your business, and there’s a good chance that they’re the CPA who filed the tax return in question.

Join the nation's largest group representing the new workforce (it's free!)

Become a member

Enrolled Agent

Enrolled Agents prepare tax returns and have special privileges to act as a representative before the IRS. They typically charge less than a CPA or lawyer would.

Tax attorney

Tax attorneys differ from CPAs in that they can represent you in legal matters and attorney-client privilege applies, which means anything you share with your tax attorney is legally confidential.

If your case seems particularly serious (perhaps you didn’t claim all of your income), or the IRS says that you owe a large amount of money, you should consider getting legal representation for the audit.

A tax attorney can also defend you against any criminal charges that arise, if it comes to that.

Before hiring someone to represent you, ask them about their previous experience representing businesses during a tax audit and what fees they’ll charge for the service.

An added bonus to having professional representation is that the IRS is required to communicate with the representative instead of with you. To make this happen, complete and submit Form 2848, which notifies the IRS that you’ve hired someone to represent you during the audit.

Gather your information

When the IRS first contacts you, they’ll let you know the specifics of the audit. Once you know what section of your return is being audited, gather all supporting documents for those line items – including relevant receipts, invoices, and check stubs – and send them back to the IRS with a letter explaining the significance of each piece.

If all of your documentation in order, many audits will end at this point.

Don’t volunteer extra information

It pays to be polite during an audit, but don’t go above and beyond the call of duty. Never volunteer extra information. Instead, give polite answers to direct questions.

If you are asked about something that isn’t covered in the audit notice, you can decline to comment.

Serious troubles? Get a tax attorney

If you think that you may be found seriously negligent, get a tax attorney straight away. You have no legal privilege with a CPA, so it’s best to hire a lawyer in this case.

There’s no way to guarantee that you’ll avoid an audit, but following these steps will help you steer clear of audit red flags and, should the time come, deal with an audit as quickly and painlessly as possible.

Got any more questions about surviving an audit? Post them below or tweet them to us and we’ll do our best to help you out!

Kendra Murphy is the Content Creative at Bench, the online bookkeeping service that pairs you with a professional bookkeeper to do your books for you.

Freelancers Union members get 20% off their first six months with Bench. If bookkeeping is taking up too much of your time, start your free trial today.