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Most important... do not lie.
Don't volunteer anything! Keep your responses short and to the point.
I completely agree. I have thankfully never had to do one of these, but my accountant has done several. He explained that you want to let the IRS agent lead the interview. Don't bring all of your papers, don't volunteer anything. Simply answer the questions they ask truthfully and concisely. Don't ramble on or offer up additional details. If they want more details they will ask.
Here is a mistake I have heard friends of mine make. Don't take all of your records for one year or several years and let the agent start a free hunting expedition. You need to remain in control of everything the entire time. If you offer up additional records or details you can bet they will take you up on the offer and dig and dig and may find things they weren't even looking for.
Most important... do not lie.
Also excellent advice. Remember if you get caught in a lie you could quickly cause the audit to escalate and may even cause it to switch into the criminal realm instead of the simple fine, penalty and pay extra tax realm.
But what if they ask me what exactly I do to earn my income?
My guess is they won't ask such a vague question. They might and if they do answer it is quickly, truthfully, and most importantly concisely as you can. From what I have read and heard from others that go through this is the agent usually has very specific questions about very specific items on your tax return. Again, let them lead and tell you what they want.
Keep the answeres from being specific that will lead to more questions. Play dumb disclose only what you disclosed on the return. If they open a can or worms then tell them you will need to look into it and will get back to them on it.
Less is better.
The IRS is only interested in one thing income verses what you claimed as income.
The audit letter should have stated specifically what the auditor wants to review, although he/she is pretty much free to ask for anything related to that year.
The auditor will most likely pour over all your bank statements for the year. Every deposit is deemed income and will be totaled and matched against your return. Although that sounds pretty straight forward, in reality, it isn't. Let's say that you were short of cash and took a $5,000 cash advance from your credit card to get you through. Well that $5,000 looks like income, so you'll need to document it as a loan (and also show how/when it was paid off). My advice: go through all your bank statements well before the audit and document/explain all deposits that are not actually income.
Oh, and I assume that your personal and business accounts are clearly separated and are never mixed. Otherwise, it's another can of worms to explain and will be very closely scrutinized. (You can do it- it just takes a lot more documentation/explaining.)
Other specifics/suggestions depend on your tax structure (sole prop, corp, etc.).
When the auditor is finished, he/she will most likely give you some homework for any answers/documents that were not be provided during the initial interview. He/she may have some follow-up questions after that as well. Once all the questions have been answered, the auditor will prepare you a report and submit it to you. Either the auditor will agree the tax return was prepared correctly or will list one or more "discrepancies" with a revised amount due (including any taxes/penalties). You can either agree or disagree with it. If you disagree, you'll most likely need additional documentation and supporting evidence. If you and the auditor can not reach a compromise, you can refer the issue to his/her supervisor for review. If you are still not satisfied with the results, you can continue to fight the matter in Tax Court.
Oh yeah, forgot about that. So far, we've revised the return twice from the audit. Each time, we found additional deductions.
We fell like telling the auditor to just quit now instead of losing the government even more money. :)