Never volunteer information. Only give the auditor information that they specifically request.
 

Never lie to the IRS. If the auditor asks a question that will be hard to answer, give a non-binding answer such as "I will need to look at my records" or "let me talk to my accountant and get back to you next meeting". You then have time to think of the best response and perhaps the subject will not even come up the next time you meet with the auditor.
 

You may want to have your CPA or attorney meet with the auditor instead of yourself. Only give your CPA the information that is relevant to the issue at hand. When the auditor asks questions that are outside of that issue, the CPA or attorney doesn't know the answer and you aren't present to provide additional information. The auditor's inquiries into other potential audit areas will be partially roadblocked.
 

You may not want to agree to the assessment that the agent makes if you have an argument to make. Tell the agent that you are not satisfied and you want to appeal to his or her supervisor. You may get a favorable deal from the agent at this point. If the offer is not good enough, you may want to make your appeal to the supervisor and see what happens. If you don't get a favorable offer from the supervisor, you can send a formal protest letter to the IRS District Director notifying that you intend to appeal(the letter needs to be sent within 30 days of the initial audit assessment). You will take your case before an appeals officer who will be strongly motivated to settle your case. If you lose the appeal, you can still probably take your case to tax court. Just by threatening to take your case to tax court may give you the leverage needed to make a deal out of court since the IRS does not want to waste time and money going to court. The bottom line is that the further up you take your case, the better your chances are for a good settlement with the IRS.
 

File extensions on your current year's tax return if you are under audit. Your current year's tax return is open for audit if you file it while being audited for prior years. It's better to file extensions and wait until the audit is completed before filing your return.
 

Once your tax bill has been established, you basically have three options available if you are not able to pay the full tax bill. Each of these options can get complicated. Professional tax advice should be sought to best choose the option that meets your tax situation. Remember to file your tax return on time even if you don't have the money to pay your tax. The penalty for not filing your return is 5% of your tax liability a month up to a maximum of 25%.

(a) Installment Agreements - If you owe less than $10,000 in taxes, you are legally entitled to an installment agreement if you meet certain conditions. Fill out Form 9465 and attach it to your return. In order to minimize your penalties and interest you should pay as much tax as you can when you mail in your tax return. Put down the amount that you can pay each month keeping in mind that the bill must be paid off within 3 years (including interest and penalties). Once the IRS receives your Form 9465, they will contact you with information on how to make the payments.

The conditions for the automatically-accepted installment agreement are: (1) the tax due is less than $10,000, (2) you have filed all of your tax returns in the previous five years, (3) you have paid all of your income taxes in the past five years, (4) you have not had a previous installment agreement in the past five years, (5) you agree to pay your liability within 3 years, and (6) you agree to meet all your future tax liabilities. If you don't meet the conditions for the automatic installment agreement, you can still file Form 9465 to see whether the IRS will accept an installment agreement with you.

If you can obtain a loan or credit card to pay off your taxes, a lot of times the interest rate for your loan or credit card is lower than the interest rate and failure-to-pay penalties assessed on installment agreements. The effective annual rate of installment agreements can be higher than 20%.

(b) Offer in Compromise - If you do not have the ability to pay your full tax bill even if you are given extra time to pay it, consider making an offer in compromise. Basically, the IRS looks at your current assets and your potential future income in determining whether the offer in compromise you propose is acceptable. If all the IRS can squeeze from you is 10 cents on every dollar of tax liability, the IRS will probably accept an offer in compromise of 10 cents on the dollar. The dollar amount of your offer is not important. What is important is the dollar amount the IRS feels it can obtain through its collection efforts. If you offer less than what the IRS feels it can collect, then your offer will be rejected. Use Form 656 as well as Form 433-A (and Form 433-B if you are an owner in a business) in preparing your offer. Send these forms to the IRS separate from your tax return. Form 433-A is a financial statement that lists all of your assets, liabilities, monthly income, and expenses. A qualified tax professional will greatly increase your chances of a successful offer and can help you analyze any potential traps in making an offer in compromise. If you do the forms yourself, get a book that gives detailed instructions on how to do offers in compromise. If you are thinking about declaring bankruptcy, you should consult a lawyer before filing an offer in compromise.

(c) Bankruptcy - If done right and if certain rules are met, your federal and state income tax liabilities can be discharged by declaring bankruptcy. Consult a competent attorney who has a good knowledge of the tax laws. The timing of when you file your bankruptcy is crucial. If you file bankruptcy to soon, your tax liabilities will not be discharged.