How to Handle a Tax Audit; the IRS Says I Owe $25,000

By in Taxes | 29 comments

The Dreaded IRS Tax Audit Letter

The thick IRS letter arrived and I assumed it enclosed the tax forms I ordered. I was wrong. The letter contained a list of 5 sources of income that were not included on my 2010 tax return. Total bill due the IRS including penalties and interest, $25,000.00.

Panic set in.

Ironically, 2010 was the year I was exceptionally familiar with the tax law as I served as a VITA volunteer tax preparer for the IRS. What was going on?

I caught my breath and raced upstairs to my home office to look for the 2010 return. Fortunately, even after a cross country move, I found the file containing the returns and a back up file.

how to handle a tax audit

Call to the IRS-Handle the Tax Audit

After failure to reach my accountant (I guess 9:30 PM is a bit late for an accountant to be working), I decided to call the IRS early the next morning. I was quickly transferred to someone in the audit department. This helpful and confident man walked me through every item in the letter. We discussed what information the IRS needed. He gave me details and tips to avoid problems with this audit.

“Don’t sign at section one as that admits to owing the tax!”

I am in the midst of the arduous process of going through each of the claims and providing support that shows I have complied with the law and do not owe any additional tax.

{When handling with a tax audit, stay calm!}

Why was I Targeted for an Audit?

The major culprits were two certificates of deposit (CD) that came due in 2010. Last time I checked, as long as I paid the tax due on the interest received on the CDs, which I did, I was in compliance with the IRS. Here’s the problem, the principal received when the CDs came due was listed on my aggregate brokerage statement. I didn’t include this repayment of principal as I didn’t think it was necessary.

Fortunately, the fix for this oversight is to prepare an amended schedule D with the cost basis and sales price listed on the CDS. Since these amounts are the same, no tax is due.

There were three more items on the audit. Two of them dealt with education credits. The IRS wanted to make sure we incurred the tuition costs for which we were claiming a credit. Another quick search revealed I had no idea where my receipts were for the tuition we paid on behalf of Jr. Carino for her college expenses in 2010. No problem. After a quick call to the University, the assistant controller emailed me a receipt of tuition payments.

The final two issues regarded an IRA rollover. I’ve been combing IRS documents for two days. Have you ever tried to make sense of these booklets? I don’t know who they are written for, but it is not the general public.

As far as I can tell, without revealing too many details, there is no tax due on those rollovers either.

According to my calculations, we don’t owe anything and we have back up and documentation for all the contested items.

Tips for Handling a Tax Audit

Audits sometimes happen. Usually they begin with a letter in the mail. In fact, I’ve been through this before and am confident that our issues will be resolved after a lot of research, documentation, and letter writing. These tips will serve you well in handling your records and preparing you for the dreaded “audit letter”.

  1. Keep copies of prior year tax returns.
  2. Keep copies of all documentation to back up the returns.
  3. Know where your copies are.
  4. If you have an accountant prepare your taxes, understand the documents yourself as well.
  5. Call the IRS for clarification. This lets the IRS know you are responsible and gives you additional information and clarification.
  6. Make notes on the IRS conversation.
  7. After completing the amended documents required, write a detailed letter outlining your case. Leave nothing out.
  8. Keep copies of everything.
  9. Send the information back to the IRS in a certified, return receipt packet. That way you have a record of the date mailed.
  10. Follow up with a call to the IRS in a month to check on the progress of the audit.
  11. Consider using a program like Turbo Tax to make your records easy to access in the future.

Life throws you curve balls when you least expect them. Be resilient and tackle the issues head on. You will get through the tax audit. Accept that it will take time, organization, and follow through.

Can’t Get Enough Tax Audit Information?

10 Most Im portant Things to Know About a Tax Audit; IRS Tax Attorney

How to Handle a Tax Audit; Smart Money

How to Handle a Tax Audit; Financial Highway

How to Handle a Tax Audit; Bloomberg  Businessweek

Have you ever gone through a tax audit? How did it work out?

A version of this article was previously published.


  1. I would think that gold-mining stocks would be a very safe choice, especially considering the state of the world. In uncertain times, people default to the familiar ‘safe-zones’.

  2. Sorry to hear you are going through this! However, it sounds like you are able to refute the charges. Hopefully this will be resolved quickly.


    March 30, 2012

  3. I went through a tax audit a couple of years ago as well. It was right after my dad passed and I owed nearly $10,000 due to some of his things being taxed. It sucked, I was only 19 and do to family problems (and others stealing), I never actually received any inheritance but still had to pay the taxes.


    March 30, 2012

  4. I would add “Don’t Panic” to your list of tips.

    I think people have a common tendency to freak out if they get a letter from the IRS. But resolving it can often be as easy as simply sending the IRS a receipt or two and a letter of explanation.

    I received an audit letter like this myself a few years ago. THe IRS demanded around $3000. I had failed to properly report a stock sale transaction and it was resolved pretty easily.


    March 30, 2012

  5. A notice of audit is like receiving a draft notice. I remember that letter too. It scares the crap out of you until you find the supporting documents. I was audited 30+ years ago and the preparation for the audit was worst than the audit. It took me 8-12 hours to prepare for the 30 minute audit. I remember my neighbor who was a former IRS prosecutor kid me about it. He said there is nothing to it unless two Feds show up with gold badges at your work. Then get scared! He prosecuted serious criminals in New York. Although there was no change for me, it is very scary to go through it.


    March 30, 2012

  6. So sorry you are going through this Barb. Looks like you are well prepared though. I am going to locate all of my documents right now just for good measure.


    March 30, 2012

  7. It’s good that you are knowledgeable on this and you were able to get the documentations to fix the problem. How about those people that don’t know much? This shows also the importance of keeping records and keeping in safety all your important receipts and documents. You’ll never know…the IRS might just send you a letter one of these days.

  8. Yikes. That kind of letter would have me a little more than intimidated. I suspect we are going to see more and more of this because of all the information automation going on with taxes. The problem is the reporting information from business like W2’s and financial firms is straight forward, but the forms you fill out to the IRS is not.

    You might do your taxes right, but because 1040’s aren’t a very intiutive document, I suspect that software is going to flag more people.

  9. Barb, I am so sorry to hear this and hope that you will manage to sort it out. This has never happened to me but I would imagine that receiving a letter like this feels like a shard of glass has been lodged in your chest – well this how I feel under extreem pressure anyway. Thinking of you.


    March 31, 2012

  10. @Melissa, I am working through the charges and it will be over soon 🙂
    @Michelle-I feel really bad about that, that is awful. Not getting the inheritance but being smacked with the tax.
    @Jim, I agree. I’ve dealt with these types of letters before and they have been resolved with a bit of time and paperwork!
    @Krantc-The preparation is whats killing me. I’m on day 3 and I’m about 60% done.
    @Busy and Ann- I am really glad I could locate the records. I was especially stressed since we moved this summer!
    @Wayne and Maria-Just like most unexpected upsets, at first it is terrifying, but once I started dealing with it, my anxiety waned.


    March 31, 2012

  11. Back in 2002 the IRS sent me one of those dreaded letters saying I owed them $3000 in back taxes, on top of every refund I ever received being garnished. I called “the man” and asked what the basis was for the amount they said I owed. “Your short term stock sales.” “I don’t have any short term stock sales; it’s on my Schedule D.” “Ummm, let me see here.” It turns out since I filed paper returns and the IRS input everything in by hand, someone had listed my long-term capital gains as short term capital gains, causing an immense problem. It got handled immediately, but it’s very important to keep all documents possible. I always keep a copy of my tax return, and the basis for any major things like stock purchases or sales.

    Andi @ MealPlanRescue

    March 31, 2012

  12. Man, my heart would have sunk if I got that letter. It just goes to show the importance of having all of your records organized!

    Robert @ The College Investor

    April 1, 2012

  13. @Andi, Thank you for the detailed response, that information about contacting the IRS immediately and keeping records is golden if you ever get the dreaded audit letter.
    @Robert-My heart did sink!! And I was really lucky that I could access the records.
    @Isthiak, Keep copies of everyting, and make sure they are organized so you can find them when necessary.


    April 1, 2012

  14. It’s absurd how difficult it is to comply with the tax laws. They should be scrapped and replaced with something more fair and reasonable.

    I got a letter audit a couple of years back, because I forgot to total a line on my Schedule D. That was when you could never get anyone from the IRS on the phone. I wrote a bunch of letters to my case worker, including documentation. But, she just kept sending me a form letter saying I owed. So, I told them I wanted to appear in Tax Court. Then, they got a lawyer to send me a form letter saying I owed. I sent them a letter back saying either someone needed to actually talk to me or I wanted my day in court. The “appeals” guy called me up, took one look at my case and dismissed the whole thing.

    It was very scary, frustrating and wasted a lot of my time. No one should ever be presumed guilty in America, but that’s how the IRS operates. It does seem to have gotten better lately.

    Bret @ Hope to Prosper

    April 1, 2012

  15. Sorry I haven’t been around for awhile–been sick. But feeling better:).

    I totally would have panicked as well–glad to hear you have all of your documents in place, or were able to locate them quickly.

    Amanda L Grossman

    April 1, 2012

  16. This is very useful, not only for showing what to do, but stressing to remain calm, especially when you know you are in the right.

  17. @Bret, That is a horrible story. I was really lucky as I got a helpful guy on the phone very quickly. Right now I have 11 pages of documents compiled and ready to mail tomorrow. You are so right that the tax laws need to be simplified. They are simply too cumbersome and difficult to understand!
    @Amanda-Quick panic, then on to resolution:)
    @MArk and John, Remaining calm is really important. Panic does not help!


    April 2, 2012

  18. Check your unrestricted retained earnings. This is for corporations. If your corporation’s unrestricted retained earnings exceed paid up capital, then this will give rise to an improperly accumulated earnings tax. To prevent this, the corporate stockholders and board of directors can declare dividends or appropriate part of the unrestricted retained earnings for restricted use to reduce it.


    April 3, 2012

  19. Wow! Makes me want to keep better records myself. Great job at keeping your cool and not freaking out.

    Brent Pittman

    April 4, 2012

  20. Hi Brent, I am really happy I had all of the documents and found my returns and back up information easily. The only part I couldn’t locate were the electronic copies of the returns. Oh well…


    April 4, 2012

  21. Sorry to hear that you have to go through this arduous process. It can really be stressful but I hope everything is okay now.


    April 4, 2012

  22. I accidentally claimed that the federal government withheld more from my paychecks than they actually did. It was 331.00 I put 3331.00. I noticed this when I received an extra $3000 refund. What should I do.

    Jim Cutler

    May 27, 2013

  23. I’m a landlord and I have had the horror of being audited. I wound up owing a bunch and it was absolutely nerve wracking to wrap my head around how things were going to play out. I’ve been looking into self directed IRA for real estate recently and think it might be a great idea to keep everything in one place and well organized. In the end, my problem really was an organization issue, so the software definitely helps.

    S. Smith

    June 27, 2013

  24. yikes!

    Now I’m worried about my CDs as several came due in 2014 and I didn’t report the cost basis. I also didn’t get a form from my bank staying the case.

    Is having to report the cost basis for a CD the norm? If so, I should have gotten a form.


    Financial Samurai

    April 9, 2015

    • @Financial, I’m not a tax accountant, (although sometimes I feel like one), so I don’t know what the specific ‘law’ is regarding this matter. In my case, even though I was audited and questioned for not listing the cost basis of the CD’s, I didn’t owe any taxes and just fixed the mistake. Although I can’t legally give you advice, I’d probably google the question, look on the site, contact your accountant, or just forget about it. Let me know what you choose. Anyhow, I wouldn’t lose any sleep over it. I must admit that the IRS has been okay to deal with and their website is great!

      Barbara Friedberg

      April 9, 2015

  25. Thank you for this article, we are never too careful when it comes to tax audits… I’ll apply these tips if I need to.


    April 28, 2015

  26. Invaluable comments , I was fascinated by the info – Does someone know if I might acquire a template IRS 706 copy to complete ?

    Micaela Wurm

    July 3, 2016


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