Super auditors

IRS's "Market Segment Specialization Programs" are training "super" auditors to become familiar with a variety of industries. Audit Technique Guides(ATGs) help taxpayers know which areas will be reviewed and what to watch out for. An ATG for healthcare may be forthcoming.

Travel and temporary living expense deductions have been—and probably always will be—perennial "areas of interest" for IRS audits. If you have legitimate expenses, maintain good records and claim the deductions in a reasonable way, rather than paying the additional tax just to reduce your chance of audit. For vehicle mileage, be sure to have proof of total miles driven, and a calendar itinerary log of travel mileage. For cell phone usage, claim less than 100 percent for business, unless you have a second cell phone dedicated to business use.

The audit

Most professional tax preparers agree: The more organized and professional your approach is during the audit, the better chance you have of a good outcome. Your receipts should be collected and organized by tax return category with a calculator tape cover whose total matches the same category on your return. Read the audit "invitation" carefully, and prepare supporting documentation for all requested areas. If you feel intimidated or unfairly treated at any point, stop the auditor and request supervisor intervention or professional representation—it is your right.

Professional assistance

Even if you completed your own tax return, you may wish to consider professional representation for an audit. Only an attorney, certified public accountant, or enrolled agent can represent you before IRS for returns they did not prepare themselves. Advantages of professional assistance usually far outweigh the cost. A qualified professional has firsthand knowledge of how IRS operates, is able to understand and use appropriate jargon, knows what an auditor is looking for, and is well versed in avoiding "tricks." Even more important than knowledge is the confidence a professional should have developed in dealing with IRS—and the ability to respond accordingly. Remember, as with testifying in court, the best course of action in audit is to answer any question simply, honestly, and succinctly, without elaboration.

Audit philosophy

Ask yourself or your professional representative what philosophy will guide the approach to be used at audit. It is unreasonable to assume that your return is perfect. Expect auditors to find some discrepancy. But remember, every audit is a negotiation. Do not jump at the first offer to close: It will almost certainly result in you paying extra tax.

The last word

Not since before the IRS Reform and Restructuring Act of 1998 have tax preparers seen such a resurgence of audit activity. Therefore, it seems prudent for you to prepare records and tax returns as if an audit is inevitable.

The preceding discussion is general in nature, and should not be considered advice for any individual tax situation. You should consult with your personal tax planning professional for specific guidance relating to your unique circumstances.