Blog | Personal Finance

Don’t Fear An Audit (But learn How To Survive One If You Have To)

Eliminate your fear of a tax audit simply by being prepared

In the U.S., it’s the dreaded Internal Revenue Service (IRS). In Canada, it’s the Canada Revenue Agency (CRA). In Australia, it’s the Australian Taxation Office (ATO). And in Great Britain, it’s Her Majesty’s Revenue & Customs (HMRC). Whatever country you’re in, and whatever the name of the tax collector, it’s downright scary for most people to think about having their tax returns audited.

What makes us afraid of a tax audit? What could be worse? They can seem big and scary.

In reality, tax auditors are just normal people doing their job. They won’t attack unless provoked. And if you’re well prepared before you run into them, even the toughest auditor won’t scare you in the slightest.

Preparing for a Tax Audit

When I was about five years old, I was attending the New Fork Scout Camp. While we were out walking one night, a big black bear wandered through the camp. He was huge, especially to my five year old self. I ran as fast as I could back to the trailer, my heart pounding and my eyes wide. I’ve never been so scared in my life as I was of that bear. I thought for sure I was going to die.

As adults, we tend to be afraid of many things that seem even worse than that big black bear. For many people, it’s the tax collector.

My challenge with that bear is that I was not prepared. As you’re reading this you probably think, “You shouldn’t have ran, that’s the worst thing you could have done!” But I was young, uneducated and unprepared...like so many when it comes to tax audits.

I was hoping that the bear wasn’t chasing me, but hope alone is never the best option. Being prepared is best.

Organize Your Tax Team

The first and most important defense against an audit is to have the right team in place. Robert Kiyosaki says, “Having the right team is more important than the money.” He’s right. Without the right team, you’re definitely not going to have any money.

The first person you need on your tax team is your tax advisor, who should also be your tax preparer. Your advisor is the person who should be on the front lines of confronting the auditor. In fact, your advisor should be the only person directly dealing with the auditor.

An equally important team member should be a good bookkeeper or accountant. Your bookkeeper is going to help you keep all of your records and documentation so you can be well prepared for the audit, with accurate information.

Handling an Audit

Remember what I said about a good advisor? That person is going to be handling the audit. You’ll still be involved, but only to gather information for your advisor.

I make it practice to never allow a client to meet the auditor. This way, if the auditor asks me a question, I can say, “I don’t know.” If a client is in the meeting with the auditor, it becomes a little suspicious for the client to say they don’t know the answer to a question. When I’m with the auditor, alone, I can ask him to clarify what information he really needs and then give him only the information that answers his questions.

Important Note

Not all tax advisors are created equal.

Tax advisors vary in knowledge and experience even more than health care professionals. Your tax bill will have more to do with choosing your tax advisor than anything else you do. Hire the right tax advisor and avoid a lot of costly mistakes.

To learn more about taxes, and how to use the tax code to make you richer, get my book, Tax Free Wealth.