Does your CPA defend your books? Do you have to hire a tax attorney? Do you go to court?It depends. Some audits are mail; they simply want to see your back up for say - donations. Some are a little more extensive where you can do mail or a personal meeting or have them come to you (or your CPA) to go through the receipts.
It's up to you whether you want a professional involved. Many times human nature kicks in and people talk too much. They don't answer the question, they answer the question and then tell a story to boot or they answer a completely different question...or worse, they answer the question incorrectly....that's not to mean they lie, they simply say something they shouldn't or give WAY too much information.
About 2-3 years ago I had an agent that asked a lot of yes or no questions and I answered yes or no. They wanted me to talk my head off.... and it got to a point where they asked me to explain or describe something and I'd reply "can you be more specific", and at some point they'd ask a yes or no question
If you get to a point on a deduction or a position where it gets difficult you may need a tax attorney and ONLY if something doesn't go your way and you've exhausted your appeals will you decide if tax court is necessary.
These questions may be stupid, but I have no idea how this works....
How many years does the IRS go back through one's books?Generally they can't go back more than 3 unless they believe fraud is involved.
How many years of receipts does one need to keep?We suggest 5 years of normal operating receipts and keep capital assets for as long as you own them and then 5 years from the year of sale.
I am wondering how expensive this can get...I am sure it depends on what they find....Correct and again, depends on how clean your records are and how organized you are. The more organized and complete your records are the lower the cost in most cases. Of course even with the best records if you took a position that gets challenged and disallow it and you believe in it, the more you fight it the more it costs.
In my experience the average cost of an audit that our clients have paid us is probably between $3k-$6k. Of course some can be handled easily for a few hundred dollars and some cost more than 6, usually due to poor records and risky positions on tax deductions.