What Does It Mean When Your Audit Case Was Closed?

Receiving notice that your audit case has been closed can be a relief, but it’s important to understand what this means for your financial situation. The closure of an audit simply indicates that the IRS or relevant tax authority has completed its review and made a final determination.

What happens next depends on the audit’s outcome. You may owe additional taxes, receive a refund, or see no changes. Regardless of the result, ensure all documentation is stored and take any necessary steps to address payments or appeals.

The Closure Notice

Once an audit is finalized, the tax authority issues a closure notice, formally documenting the conclusion of their review. This notice serves as the official record that the examination of your tax return has ended and outlines any determinations made. In the U.S., the IRS typically sends Letter 894 for audits with no changes or Letter 525 if adjustments were made. If additional tax is owed, a Notice of Deficiency (Letter 3219) may also be issued, giving you the option to challenge the findings before they become final.

The closure notice specifies whether the audit was resolved through an agreement or if the tax authority made a unilateral determination. If you signed an agreement, such as Form 4549 (Income Tax Examination Changes), you accepted the proposed adjustments. If no agreement was reached, the tax authority may have issued a determination based on available records, which could still be subject to further action. The notice will also indicate whether penalties or interest have been assessed, which can significantly impact the total amount owed.

In some cases, the closure notice may include instructions on next steps, such as deadlines for payment, appeal rights, or refund processing. If you receive a Notice of Deficiency, you generally have 90 days to file a petition with the U.S. Tax Court before the assessment becomes final. Missing this deadline could limit your options for disputing the findings.

Potential Financial Results

The conclusion of an audit can lead to different financial outcomes: no changes to your tax liability, an additional amount owed, or a refund.

No Tax Changes

If the audit concludes with no changes, it means the tax authority reviewed your records and determined that your original tax return was accurate. In this case, you do not owe additional taxes, nor are you entitled to a refund. The IRS typically issues a “no change” letter, such as Letter 894, confirming that the audit is closed without adjustments.

Even if no changes were made, retain all documentation related to the audit. The IRS can reopen an audit under certain circumstances, such as discovering fraud or receiving new information. Generally, the IRS has three years from the date you filed your return to reassess your taxes, but this period can extend to six years if substantial income (more than 25% of reported income) was omitted. Keeping thorough records ensures you are prepared for future inquiries.

Additional Tax Owed

If the audit results in additional tax liability, the closure notice will specify the amount due, including any penalties and interest. The IRS calculates interest from the original due date of the return until the balance is paid in full, using a rate adjusted quarterly. As of 2024, the interest rate for underpayments is generally the federal short-term rate plus 3%.

Penalties may also apply. If the IRS determines there was a substantial understatement of income tax (exceeding the greater of 10% of the correct tax or $5,000), a 20% accuracy-related penalty may be assessed under Internal Revenue Code 6662. More severe cases, such as fraud, can result in penalties of up to 75% of the underpaid tax under Internal Revenue Code 6663.

If you agree with the findings, you can pay the balance immediately or arrange a payment plan. If you disagree, you may appeal or request reconsideration, but strict deadlines apply. The Notice of Deficiency provides 90 days to challenge the assessment in Tax Court before the IRS finalizes the amount owed.

Refund

In some cases, an audit may determine that you overpaid your taxes, resulting in a refund. This can happen if deductions or credits were incorrectly disallowed on your original return or if the audit uncovered additional eligible expenses. The IRS will issue a refund, typically with interest, calculated from the later of the return’s original due date or the date the overpayment was made. The interest rate is generally the federal short-term rate plus 3%.

Receiving a refund does not mean the matter is permanently closed. The IRS can still audit the same tax year again if new information arises, though this is uncommon unless fraud is suspected. Additionally, if you have outstanding tax debts from other years, the IRS may apply the refund to those balances instead of issuing a payment.

If you believe the refund amount is incorrect, you can request a reconsideration or file an amended return. However, there are time limits for claiming additional refunds—typically three years from the original filing date or two years from the date the tax was paid, whichever is later, under Internal Revenue Code 6511.

Payment Arrangements

Settling an outstanding tax balance after an audit can be challenging, but tax authorities offer options to help manage payments. The simplest approach is to pay the full amount immediately, preventing additional interest from accruing. If paying in full isn’t feasible, structured payment plans provide flexibility.

One common option is an installment agreement, allowing taxpayers to spread payments over time. The IRS offers short-term agreements (for balances paid within 180 days) and long-term agreements (for amounts requiring more than 180 days). As of 2024, taxpayers owing $50,000 or less in combined tax, penalties, and interest can typically qualify for a streamlined installment agreement without submitting additional financial documentation. For larger debts, a more detailed financial disclosure may be required.

In cases of significant financial hardship, taxpayers may explore an Offer in Compromise (OIC), which allows them to settle their tax debt for less than the full amount owed. Eligibility depends on demonstrating an inability to pay the full balance through income or assets. The IRS evaluates factors such as monthly income, necessary living expenses, and equity in property to determine an acceptable offer. The application process involves submitting Form 656, a non-refundable application fee, and an initial payment toward the proposed settlement.

If neither an installment plan nor an OIC is viable, taxpayers facing extreme financial difficulties may request a temporary delay in collection. This status, known as Currently Not Collectible (CNC), does not erase the tax debt but temporarily suspends enforcement actions such as wage garnishments and bank levies. The IRS periodically reviews CNC status to assess whether financial circumstances have improved.

Records to Keep

Maintaining thorough documentation after an audit is necessary for both compliance and future financial planning. The IRS generally recommends keeping tax-related documents for at least three years, but longer retention periods may apply depending on the nature of the audit findings.

Audit workpapers, including correspondence with the tax authority, examiner notes, and supporting schedules, should be preserved alongside the original tax return. These documents provide insight into how the audit was conducted and can be useful if discrepancies arise in subsequent years. Businesses should retain financial statements, general ledgers, and trial balances, as these records serve as the foundation for tax filings.

Supporting documentation such as bank statements, payroll records, and invoices should be kept intact, particularly if adjustments were made during the audit. If depreciation or amortization schedules were revised, maintaining updated fixed asset records ensures accurate reporting in future periods.

Reconsideration or Appeals

Receiving an audit determination does not necessarily mean the outcome is final. If you disagree with the findings, there are formal processes to challenge the results, either through an appeal or a reconsideration request.

Reconsideration

An audit reconsideration is an option if you have new information that was not previously considered or if you believe the tax authority made an error in its assessment. This process allows taxpayers to submit additional documentation to support their position. Unlike an appeal, reconsideration does not have a strict deadline, but it is generally more effective when initiated promptly.

To request reconsideration, taxpayers must submit a written explanation along with supporting documents to the IRS. If the reconsideration request is denied, the taxpayer still has the right to pursue an appeal.

Appeals

If you disagree with the audit results and do not have new evidence, or if a reconsideration request is denied, the next step is to file an appeal. The IRS Office of Appeals is an independent body that reviews disputes between taxpayers and the agency. To initiate an appeal, taxpayers must submit a formal written protest, typically using IRS Form 12203 or a detailed letter outlining the reasons for disagreement.

If an agreement is reached, the case is closed with a binding settlement. If no resolution is found, the taxpayer may escalate the matter to the U.S. Tax Court.