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If you're in business, you have around a 1 in 100 chance of being audited by the IRS. If you run a business from home, your chances go up about four times. As long as you keep your books in good order, though, an audit is nothing to be scared of. The IRS won't audit you just to harass you.

They just want justification of certain items on your tax return. There are two important things to do if you get audited, though, that can protect you and your business from undue problems.

If you receive an audit notice from the IRS, it is very important that you know the rules and even more important to let the IRS know you are not an uninformed taxpayer. The more rights you assert, the better off you will be. You begin to assert those rights by being the one to establish the ground rules of an audit.

You have the right to conduct the audit at a time and place that is convenient to you. Use this right to prepare and avoid being caught off guard. You have the right to record an audit as long as you give the IRS the same right. Using this right prevents the IRS from changing the rules midway through the audit. You have the right to limit the scope of the audit to avoid time and trouble discussing issues not relevant to your tax liability.

Here are some common bluffs that the IRS may pull:
Bluff One - You cannot claim a deduction without a receipt or canceled check.
Bluff Two - You have no right to challenge an auditor's decision.
Bluff Three - You must disclose every aspect of your financial life.
These claims are not true. You have rights -- and when you use them, you will pay less tax with less hassle.

Some IRS auditors would have you believe you must have a receipt or canceled check to claim a deduction. But, there are six ways to prove deductions if your records are lost. Few people realize that oral testimony is often enough to claim a deduction as long as it is believable and supported by the facts.

Affidavits and reconstructed records are also valuable tools used to claim deductions where typical records are unavailable. Cash contributions are a good example of deductions that go unclaimed because of the lack of written records. To prevent the IRS from claiming you have insufficient records to claim a deduction, know your rights.

In an audit there are forms the auditor may ask you to sign that can take away your rights. You could lose your right to appeal, your right to claim deductions and your right to prevent enforced collection action. Form 872 is one of these forms. It extends the amount of time the IRS can take to assess a tax -- time they may not have if you don't sign.

When the IRS notifies you that you will be audited, they will give you the choice of having the audit meeting at the IRS office, or your office. HAVING THE AUDIT TAKE PLACE AT THE IRS OFFICE IS A VERY GOOD OPTION! Many business people think that they should have the audit in their own office, so they feel more comfortable.

This is the WRONG thing to do. If you let the IRS agent into your office, you have given him or her the opportunity to view your whole operation. They will definitely be looking for other things to question you about, besides the original audit item. If you have the meeting at the IRS office, it forces the agent to focus on the original item.

The second thing you should do goes along with the first. When you go to the IRS office, THE ONLY PAPERS YOU SHOULD TAKE WITH YOU ARE ONES DIRECTLY CONNECTED TO THE POINT OF CONTENTION!

If the IRS has a problem with a certain deduction, say travel expenses, take the receipts that will back up the deduction, AND NO MORE!

If you take your complete set of business records, the agent is sure to take some time "looking for backup information" for your deduction. In reality, they will be looking for other, unrelated items that don't "look right." If you have the meeting in your office, they have every right to look through your files for the same things.

In other words, the smart thing to do is only give the IRS access to information regarding the items they are auditing you for. They will let you know the reason for the audit beforehand. This gives you the knowledge you need to protect yourself and your business from audit nightmares.

Few people know the IRS keeps secret records about every taxpayer. This record is called your Individual Master File. Knowing the content of this file can be very useful to the taxpayer. It's like spying on the IRS. For example, everything the IRS intends to do regarding one or more of your tax returns is reported in this file. How well could you prepare for IRS actions against you if you knew months ahead of time when they were coming?

Just the thought of having to deal with the IRS scares people into submission. But, did you know you have the right to conduct an audit by mail? As long as you set the ground rules as discussed earlier, and cooperate fully in providing the IRS with details of your claims, you can conduct an audit through the mail and never have to worry about a face-to-face confrontation. The greatest advantage to conducting an audit by mail is that you will never be caught off guard. You will never have to answer questions without being able to fully contemplate the need to provide the information requested. It is not uncommon for the IRS to make arbitrary determinations based on information they obtain that is really irrelevant to the return and the claims made therein. Avoid this trap by conducting your audit by mail.

The perceived power an IRS auditor has is that he is one of the most feared IRS employees. But, did you know an IRS auditor really has no power to change your tax liability, charge a penalty or seize your assets? In fact, an IRS auditor has no power to do anything without your permission.
Every citizen who disagrees with an IRS auditor has the right to bring an audit decision to a higher level of authority.

This process is called the Right of Appeal. Just knowing this right often prevents the auditor from trying to bluff you into paying more tax than you owe. It's the best negotiating tool one can have

IRS' own internal statistics show that when challenged, the decisions made by IRS auditors are wrong more than half the time. If an auditor tries to deny your rights and collect more money than you owe, you have the right to appeal that decision and recover fees and the cost of enduring an unfair audit. These costs may include travel, professional fees, postage, parking or any other cost incurred to defend against unjust claims.

Statistics show that citizens who use their right to appeal auditor decisions, along with their right to petition the Tax Court, win 60-90% of the time.

Statistics also show that, in most cases, when a Tax Court petition is filed, the case never goes to trial. In every case, the IRS tries to avoid a trial and negotiate a settlement. Tax Court is your court -- but only when you know how to use it.