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Will an IRS Audit Hurt My Credit Score?

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Getting audited by the IRS doesn’t have to be terrifying. It also doesn’t mean your credit will necessarily take a hit. As daunting as an audit can be, there are steps you can take to make it through the process with minimal stress or damage to your credit.

Here’s what you need to know about how to get through an audit.

Will an audit show up on my credit score?

When you’re audited, the IRS wants you to show supporting documents to back up what you’ve claimed in your tax return. Sometimes, audits are random. Other times they occur because something on your return stands out to an auditor. Either way, the initial audit itself doesn’t necessarily spell financial doom for your future.

“An audit won’t trigger anything credit-wise,” said Craig W. Smalley, co-founder of accounting and financial services firm CWSEAPA, in Orlando, Fla.

However, an audit could set the stage for credit trouble if you don’t manage it properly.

4 steps to understanding audits

Going into your audit with a plan can help relieve a lot of anxiety. Here are some basic steps to consider if you’re being audited.

1. Get organized

Going through the auditing process means you’ll have to provide supporting documentation, such as receipts, to substantiate the claims on your return. “It’s not as if everything in the return will be audited,” said Smalley. “The auditor will hit on maybe five or six things.” Smalley recommended making photocopies of all your original receipts before sending them to the IRS.

If you can’t find receipts for some of the items the auditor is looking for, don’t panic. “When you get the audit report back, the auditor will just disallow the expenses,” said Smalley. Then, you could decide if you wanted to appeal that decision. “Obviously, it took you something to make this money. So the IRS will usually accept that based on truthful testimony.”

2. Consider hiring a professional

It can be difficult to find your way through the process on your own. You have the legal right to representation in your dealings with the IRS, and if you can’t afford to hire representation, you have the right to get help from a Low Income Taxpayer Clinic.

When you’re evaluating representation, make sure whoever you hire is legally qualified to handle your situation. “The only person who could represent you in an audit is an enrolled agent, chartered personal accountant or an attorney,” said Smalley. You’ll also want to make sure the representative is within your budget and has seen similar situations before. For example, if you’re self-employed, it could be helpful to find someone who has experience with independent contractors.

3. Decide if you’ll appeal the auditor’s decision

After you send your supporting documents to the auditor or meet in person, the auditor will inform you of whether you owe money to the IRS. If you disagree with the auditor, you can choose to have a conference with an IRS manager, pursue mediation or file an appeal.

“People have an innate fear of the IRS, but you do have a right to appeal, and you always should if you don’t agree with something,” Smalley said. “Don’t just write a check because you’re scared to death.”

If you disagree with the auditor’s proposed changes to your tax return, make sure you let the IRS know in writing before the due date on your letter. Otherwise, you’ll have to pay the amount due before a judge will review your case in tax court.

4. Accept the result of the audit

There are many different opportunities to appeal your results — in mediation, on appeal, in tax court — but once you have a result that works for you, it’s time to take action. If the result requires that you pay the IRS, make sure you do so in a timely fashion to avoid a federal tax lien.

Also, make sure to pay all the outstanding invoices from your representative, if you used one. If you have long-term outstanding bills from your lawyer or CPA, they could send them to a collection agency, which could report them to a credit agency.

Know your rights when dealing with debt collectors

An audit itself won’t hurt your credit, but the outcome of an audit could. If you’re required to pay additional taxes and fines as a result of the audit, this could throw the rest of your finances in turmoil. Here’s how to keep your finances healthy when it comes to an audit.

1. Avoid an audit with accurate filings

While you could still be randomly selected for an audit, filling out a tax return every year and providing accurate information can reduce your chances of being flagged for one based on your return. Make sure you’re reporting all sources of income and keeping up with any current taxes owed.

2. Pursue a payment plan

The IRS offers payment plans to individuals who need to pay their taxes over time instead of in one lump sum. This option could help you keep up with your current bills while trying to pay your taxes, which could help you stay out of trouble financially.

The IRS offers both short-term and long-term plans, although they do come with setup fees, and interest will continue to be added to your balance until it is fully paid. If your adjusted gross income is equal to or less than 250% of the federal poverty level, you could be eligible to have your user fees waived or reimbursed.

3. Communicate with your other creditors

Even though you could be focused on repaying the IRS after the results of your audit, that doesn’t mean your other bills will stop. However, you might consider approaching your other creditors so you can temporarily reduce your bills each month.

For example, extending the term of your loan could lessen your monthly payments. Even though you’d be paying more on the loan over time, it could make it possible for you to keep your head above water for now. Sometimes credit card companies will work with you to find similar solutions to help you repay the money you owe. Working with lenders to find a solution is always better than ignoring your other bills, since failure to pay these on time could hurt your credit score.

Don’t panic!

Even though an audit can be scary, it doesn’t necessarily mean you’re going to suffer under a financial black cloud as a result. Stay calm and provide the IRS with the information it needs to the best of your ability. With a little luck, you can get through the process without ever damaging your credit.

This article contains links to MagnifyMoney, a subsidiary of LendingTree.


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