One of the scariest letters you can get is an IRS audit notice. It may be tempting to just not deal with it—but what happens if you ignore it, praying it will go away?

It won’t. If you ignore the notice, the IRS could disallow all your tax deductions—and perhaps your dependents. You’ll end up with a great big balance due.

So how are you supposed to respond to an audit notice? Simply follow these three steps:

1. Read the audit notice, slowly. The notice will tell you which year is under audit (generally the IRS only audits one year at a time) and what forms or schedules the IRS wants to examine (for example, Schedule A – Itemized Deductions or Schedule C – Business Profit and Loss). It will also provide a list of records or documents the IRS wants to see, as well as the audit date and the contact information (mail or phone) for the person or group in charge of your audit.

2. Figure out where the audit is taking place—and if you should change the location.

  • Will it be a mail-in audit (a correspondence audit)?
  • Must you go to an IRS office (an office audit)?
  • Is someone coming out to your home or place of business (a field audit)?

The IRS’s intention is for correspondence audits to be quick and easy. You should only have to send copies of a few documents or records, not an entire box of information, and the idea is that you will be able to handle this type of audit yourself. Or, at least, that is the fantasy.

The reality? Correspondence audits demand reams of documents—which the IRS promptly loses. Since mountains of papers are received, it can take three months to scan the docs and associate them with a taxpayer’s file. (Never send original information.)

Remember, you have the right to request a meeting in a local IRS office instead.

If you use tax professional that is located in another city or state, you’ll want him or her to handle the audit in his or her location. Send your tax pro all the records so a request can be made for the IRS to hold the audit where the records are located.

3. Determine if you can do this alone or if you need help.

When there are just a few issues under examination, you should be able to pull the records, copy them, and send them off to the IRS.

However, if this is an office or a field audit, you definitely need a tax pro to help you prepare and to be by your side when visiting with the IRS.

When the IRS is looking at certain concepts, you need expert guidance. It can be in the form of advice and handholding, or you may just want your tax pro to answer questions for you, such as:

  • Is your business really a hobby (losses for too many years)?
  • Did you report all your income (living beyond your means)?
  • Do you really have an office in your home (there’s another business or job location)?
  • Are those really your children (someone else claimed them)?
  • Are the business expenses really personal expenses (they’re over $20,000)?

Still feeling nervous? Read about your rights and check out this ten-part video series about a small business audit that was put together by the IRS. Perhaps seeing how it all works will make it easier.

Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered. Eva is the author of several books and ebooks, including the new edition of Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.