How to NOT freak out when you get an IRS audit notice

We all fear getting that dreaded letter from the IRS saying we’re being audited or owe additional taxes.  Well, we got one of those letters last summer while we were on the road last summer.

We weren’t completely surprised by the IRS letter.  2017 was a complicated tax year for us.  We sold our home and downsized from nearly 6,000 square feet to 700 square feet, had multiple jobs, incurred significant medical expenses, rented our house on AirBNB and VRBO, and moved to two different states.

The only challenge with the IRS audit was that we were nearly 3,000 miles away from all of our tax documentation when we got our audit notice, and we weren’t planning to be home for another 2 months.  Of course, the letter stated we had 30 days from the day the letter was mailed to respond. ☹

Here’s how we managed to pass our audit even while we were on the road for 5 months:

Don’t freak out about the stern language

Every IRS letter we’ve ever received has been very formal and stern. To be honest with you, even when it’s good news, IRS letters can still be very intimidating.  But, if you’ve been honest and kept good documentation, there’s really nothing to worry about.

We always have to remind ourselves that IRS letters generally aren’t personalized, so the language is meant to cover a number or situations of varying severity.  So, don’t panic!  Just try to read through the jargon and understand what they’re asking you to substantiate.

Explain your situation

Since we knew we weren’t going to be home for 2 months, we immediately sent a letter to the IRS explaining we were away from home and asked for an extension.  We were granted a 30-day extension, which wasn’t enough, so we sent another letter asking for 30 additional days.  Thankfully, we were granted that extension as well.

Keep records of EVERYTHING

Once we got back home and could go through our tax documentation, we started working on the audit.  Thankfully, we had kept really good records:

One of many loads we donated in 2017

Receipts.  We keep receipts for everything — travel, medical expenses, parking, work-related stuff, entertaining co-workers, clients, etc.  We keep hundreds of receipts every year.  I know it seems ridiculous, but you never know when you’re going to need to itemize and then substantiate during an IRS audit.

Photos.  Since we downsized from nearly 6,000 square feet to 700, we had truck load after truck load of stuff we donated to Goodwill and other charities.  Thankfully, we remembered to take photos of everything we donated.  We took photos of donated furniture, appliances, books, clothes, holiday decorations, etc.  And, you guessed it, the IRS wanted to see not only the donation receipts but the photos too!

Mileage.  You’d be surprised at the mileage you can deduct.  We traveled for medical appointments, job interviews, etc.  We kept a detailed spreadsheet of miles, parking fees, and toll.  And, once again, the IRS wanted to see that too.

Takes days to organize and seconds for our cat to mess it all up!

If you’re not sure whether you should keep a receipt, photo, or documentation…keep it!  We store all of our tax documentation in a shoe-box sized container, and we fill it every year.  Once the year is over, we organize all of the receipts in an old-school folder and file it away hoping we’ll never need it again.

Take Notes

I don’t know about you, but we can’t remember why we did something a couple months ago much less a couple years ago.

Our AirBNB/VRBO house in Colorado

One of the most complicated parts of our 2017 taxes was the revenue we received from renting our house through AirBNB and VRBO.  The local law changed half-way through the year, and we had to start collecting tax on our rental income.  Both rental companies handled taxes differently, so we had to track and pay local, state, and federal tax 4 different ways in 2017.  Thank goodness we kept good notes as to why we did what we did and documented everything in a detailed spreadsheet.  To this day, I’m not sure we did it all correctly, but what the IRS wanted to see was that we had a methodology and followed it consistently. (Note: Since 2017, VRBO and AirBNB have gotten much better when it comes to collecting and documenting taxes.)

We also kept notes about when and how we paid bills, who attended work-related events, and non-covered investment income.  

Ask questions

Some of the correspondence we received from the IRS was confusing, incomplete, or misleading.  That was the case with the initial letter we received for our 2017 audit.  We each read the letter a few times and we still couldn’t understand what they were asking in one particular section.

You really can’t communicate with the IRS by phone (unless you want to wait on hold for 3+ hours), so we wrote a letter asking for clarification.  The response we received didn’t help AT ALL, so we decided to move forward with an assumption.  When we submitted our response, we let the IRS know we’d tried to contact them, stated our assumption, and provided documentation to support our approach.  It worked!  The IRS didn’t ask any additional questions and approved what we submitted.

Just keep responding

It took 8+ months, 5 letters, and 3 packets of supporting documentation to pass our audit.  Each response we had from the IRS kept telling us we still owed taxes and penalties or needed to provide additional information.  So, we just kept providing information until the final letter, which said we didn’t owe anything!

We wouldn’t wish an IRS audit on our worst enemies, but if you do get audited there’s no need to freak out.  Going forward, keep good records and personal notes so you can have confidence that you’ve done what you’re supposed to do and can prove it.  And, if you need to, hire an accountant.  It’s worth it.

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