If You Get Audited by the IRS, What Happens?

An audit by the Internal Revenue Service (IRS) is a review or examination of an individual’s or organization’s financial records to verify the accuracy of information reported on a tax return. The primary purpose of an IRS audit is to ensure taxpayers comply with tax laws and that the correct amount of tax is paid. Audits help maintain the integrity of the tax system and ensure fairness for all taxpayers.

Understanding Audit Types

IRS audits come in different forms, each with varying levels of complexity and procedures. The most common type is a correspondence audit, conducted entirely through mail. These audits address specific, straightforward issues such as discrepancies in reported income, certain deductions, or missing documentation. They are the least intrusive and most frequent type of IRS audit.

A step up in complexity is an office audit, which requires the taxpayer to meet with an IRS auditor at a local IRS office. These audits delve into more complex issues than correspondence audits but are less comprehensive than field audits. Taxpayers will need to bring specific documents to substantiate claims made on their tax return during this in-person meeting.

The most extensive type is a field audit, where an IRS agent visits the taxpayer’s home, business, or accountant’s office to conduct a thorough examination of financial records. Field audits are reserved for more complex tax returns, often involving businesses or high-net-worth individuals, and can cover multiple years of financial records. This type of audit is the most in-depth and can be time-consuming.

Receiving an Audit Notification

An IRS audit begins with an official notification letter sent through regular U.S. mail. The IRS does not initiate audits via phone calls, emails, or social media; any such contact should be viewed with suspicion as a potential scam. This initial letter specifies the tax year(s) being audited, the particular issues or items under examination, and a list of requested documents. It also provides contact information for the assigned IRS representative and often a deadline for response.

Upon receiving an audit notice, carefully review the letter. Pay close attention to the requested information, the specific tax issues identified, and the response deadline. Verify the notice’s legitimacy by checking for official IRS letterhead, your taxpayer identification number, and a notice number. Ignoring the notice can lead to further complications and increased penalties.

Gathering Your Documents

Preparing for an IRS audit involves gathering and organizing all relevant financial documents. The IRS requests documents such as W-2s, 1099s, receipts for expenses, bank statements, canceled checks, loan documents, and investment statements. Organizing these records, chronologically or by category, can significantly streamline the audit process. Provide only copies of documents, not originals.

The absence of adequate documentation to support claims on a tax return can have significant consequences. If you cannot substantiate deductions or credits, the IRS may disallow them, leading to additional tax due. This can also result in penalties and interest charges on the unpaid tax.

Considering professional assistance at this stage can be beneficial, especially if the requested documents are extensive or the issues are complex. A qualified tax professional, such as a Certified Public Accountant (CPA), enrolled agent, or tax attorney, can help identify and organize the necessary documentation. They can also advise on potential implications of missing records and strategies for addressing such situations.

During the Audit Examination

During the audit examination, interaction with the IRS auditor will vary based on the type of audit. For correspondence audits, communication occurs primarily through mail, where you submit requested documents and clarifications. For office or field audits, you will engage in direct discussions with the auditor, presenting your documents and answering questions. Provide only the information and documents specifically requested and avoid volunteering unnecessary details.

Taxpayers have several rights during an IRS audit, protected under the Taxpayer Bill of Rights. These include the right to representation, the right to privacy and confidentiality, and the right to appeal any IRS decision. You also have the right to know why the IRS is asking for information and how that information will be used. Taxpayers can record interviews with the IRS, provided advance notice is given.

Professional representation during the audit process can be advantageous. A tax professional can communicate with the IRS on your behalf, help interpret complex tax laws, and ensure your rights are protected. They can assist in preparing for interviews, presenting your case effectively, and navigating potential challenges, minimizing direct interaction with the auditor. This professional guidance can help prevent the audit from expanding beyond its initial scope and lead to a more favorable outcome.

Audit Outcomes and Appeals

Upon conclusion of an audit examination, there are several possible outcomes. The most favorable result is a “no change” letter, meaning the IRS agrees with your original tax return as filed. Alternatively, the IRS may propose changes to your tax liability. If you agree with the proposed adjustments, you can sign an agreement form, which may lead to additional tax owed, a refund, or no change in tax.

If you disagree with the auditor’s findings, the case becomes “unagreed,” and you have the right to appeal the decision. The first step in the appeals process involves receiving a 30-day letter from the IRS, which outlines the proposed changes and your right to appeal to the IRS Office of Appeals. The Office of Appeals is an independent body within the IRS that aims to resolve tax disputes fairly without litigation.

Should an agreement not be reached at the appeals level, taxpayers have the option to pursue their case in the U.S. Tax Court. This judicial review allows for an impartial determination of the tax dispute. If additional tax is determined to be owed as a result of the audit, penalties and interest may also apply. Penalties include accuracy-related penalties or penalties for failure to file or pay on time.