Don't panic if the IRS sends you a letter

There are lots of potential errors here. Sometimes, the IRS will enter the Form 1099 information into its computer and erroneously keystroke the income amount or the Social Security number of the recipient. If the income isn't yours, you should get a letter from the bank or other payer and forward that letter to the IRS. If the amount is incorrect, send a copy of the Form 1099 mailed to you by the payer.

Sometimes, you may get a letter saying the income isn't reported even when it really is. I have a client who got a letter from the IRS demanding additional taxes for nine items of income that allegedly were not reported. In fact, seven were correctly reported on Schedule B on the return and the two others were accounts in the names of my client's children. I sent a copy of the Schedule B, with the items numbered and circled, and the issue was resolved.

Never represent yourself

What if it's the big one, the tax audit? An audit is merely a process where the IRS asks you to substantiate the numbers on your tax return.

For example, if you claimed a charitable deduction of $750, the IRS would want to see canceled checks and receipts totaling $750. If you show up with $800 in substantiation, you get a refund; if your substantiation is less than $750, you owe money.

Once you know what the IRS wants, call your tax professional. Never represent yourself at your own audit. You may know what to say, but you don't know what not to say. If the audit is simple -- to prove your charity and interest deductions, for example -- you can do it yourself by mailing in copies of your substantiation. Otherwise, for all in-person audits, I strongly suggest professional representation. In either case, if you have the records, you needn't worry.

Further, if you are audited one year with a refund or no change, it decreases your odds of being audited in subsequent years. In fact, if you are audited on the same items two years in a row with no additional taxes due, the IRS manual specifically recommends that they not audit you on the same items for the third year.

Almost all of the letters received from the IRS are computer-generated. This means that if an input error was made, it's now your problem. But in almost all cases, a well-drafted letter with appropriate substantiation will win the day.

Updated April 21, 2009

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