There is a moment of panic when you see that envelope. The IRS (or your state) is auditing you.

First, take a breath. There are some critical steps you need to take now that will reduce the amount of stress you feel later, but you need to have a cool head, and accurately assess your situation.

Here are the first five steps:

Contact your tax preparer or tax representative Determine what ATG the auditor is using Create a pre-audit strategy Make the first call Prepare for the audit

If you follow those five steps, the audit itself will go faster and smoother.

Step #1: Contact Your Tax Preparer

If someone else prepared your tax return, contact that person. If he or she is a legally recognized representative like an Enrolled Agent (EA), CPA or attorney, you can use that person to represent you with the IRS.

Generally, that is the best bet simply because someone else will be more objective.

I just finished my 31st tax season and in that time I’ve seen a lot of tax situations.

One time I was sitting in the IRS office and could overhear an auditor and taxpayer in an adjoining cubicle. The auditor asked a question and the taxpayer, obviously upset, just started rambling. With every sentence, the scope of her audit was expanded. At one point, the auditor I was working with just shook his head. He knew that some people should never represent themselves with the IRS.

Even if you do decide that you want to handle the entire audit yourself, it’s best to first go over your approach and game plan with a 3rd party.

If you don’t think that your current tax preparer has the experience you need or if you prepared the return in question yourself, you can still hire someone else to represent you.

And one more item to note: You can hire someone in another physical location to represent you. They can request to have the audit moved to an IRS office near them. In fact, this is often a good idea because you then will be working with auditor and an office where your tax representative has contacts.

Your tax preparer will want to see the letter so fax it or upload it to a secure file transfer site

Step #2: Determine What ATG the Auditor is Using

An ATG is an Audit Technique Guide. They are prepared by the IRS for use by their auditors during audits. They are the audit playbook, telling the auditor what to ask, what to request and what to look for. All of the ATGs are available. Muddling through all of them can take a while, though.

The initial letter from the IRS gives the clues to which ATGs the auditor will be using. Give the initial letter to your tax preparer or representative. They should be able to determine the guide based on the wording that is in the first letter.

Find the right ATG and you will know exactly what is going to happen: step-by-step, question-by-question and document-by-document. You’ll know the questions you’ll be asked, and, more importantly, you’ll know WHY they are asking that question. That will help you phrase your answer so that it fully answers the “why” and reduces the need for more follow-up. Don’t overlook this step. It will be critical to containing the scope of the audit.

Step #3: Create a Pre-audit Strategy

Once you know what ATG the auditor is using, you can determine what the real focus for the audit is likely to be. Are they looking for unreported or under-reported income? Do they think the loss you’ve taken isn’t allowable? Or maybe they don’t think you have the record-keeping to back up the deductions?

Have an honest conversation with your tax representative about where you think there are weaknesses in your system. Sometimes admitting to a problem is the best way to focus the auditor’s attention and complete the audit more quickly.

Step #4: Make the Call

Your initial letter likely asked you to call an IRS agent a certain date. Now it’s finally time to make that call. Or better yet, have your tax professional make the call. Do not skip the first three steps and rush to that call too quickly. The auditor will ask you questions about your tax return that you may not be prepared to answer yet. The worst thing you can do is guess right now. You need to be very accurate and precise, not volunteering any additional information.

If your tax professional is making the call, they will need to spend several hours with you first to review all the questions that the auditor may ask. Usually the first call is a preliminary to just set a time for a longer appointment. This is when you can contain the scope of the audit.

Step #5: Prepare For the Audit

Yes, preparing for an audit is time-consuming. But every hour you spend in preparation can mean less time and less cost. An auditor wants to see organized files and a knowledgeable representative.

No one likes IRS audits. But they are often just part of having a business in today’s world. There is a lot you can do to minimize the impact that an audit will have on your business and your pocketbook.

About The Author

Diane Kennedy, CPA helps business owners legally pay less tax. She’s the New York Times best-selling author of “Loopholes of the Rich”, “Real Estate Loopholes”, and 7 other best-selling financial and tax books. She’s also a business owner and real estate investor. Her motto is “It’s Your Money. Keep More Of It.” Learn more about Diane by visiting USTaxAid.