What Happens During an Audit: A Process Overview

An audit is a systematic review of financial records, operations, or compliance with rules. This process provides an independent evaluation of an entity’s financial health and operational integrity.

Receiving an Audit Notification

The initiation of an audit typically begins with an official notification, often delivered through certified mail. This formal correspondence originates from a government agency, such as the Internal Revenue Service (IRS) for federal tax matters. The notice specifies the tax year or period under examination and provides a general reason for the audit.

Included in the notification is a list of initial documents or information the agency requires, along with a specific deadline for submission. It is important to verify the authenticity of any audit notice by cross-referencing contact information or official letterheads. Upon receipt, individuals should immediately note all deadlines and consider consulting with a qualified financial professional or tax advisor.

Responding promptly and accurately to the notification helps manage the audit process effectively. Ignoring the notice can lead to further complications, including potential penalties or default assessments.

Preparing for the Audit

Preparation for an audit begins with gathering all relevant financial records. For income, this includes W-2 Wage and Tax Statements from employers, Form 1099-MISC or 1099-NEC for non-employee compensation, and Form 1099-INT for interest income. Bank statements and investment account statements also confirm reported income figures.

Regarding expenses, it is important to collect receipts, invoices, and cancelled checks that substantiate all deductions claimed. For business expenses, detailed ledgers and expense reports support expenditures. Property records, such as mortgage interest statements (Form 1098) and property tax bills, support deductions related to real estate.

All collected documents should be organized methodically, perhaps by category or chronologically, to facilitate easy review. Reviewing your filed tax return, such as Form 1040, alongside these records can help identify any discrepancies or areas requiring clarification. For self-employed individuals, a Schedule C (Profit or Loss from Business) should be supported by comprehensive income and expense records.

Ensure accuracy in documentation; all figures on your records must reconcile with the amounts reported on your tax forms. If certain documents are missing, efforts should be made to obtain duplicates from banks, employers, or other institutions. A complete and well-organized set of records can streamline the audit examination.

The Audit Examination Process

The examination phase of an audit begins after documents are prepared and submitted. This review can occur in several ways, including correspondence audits conducted entirely by mail, office audits where you meet with an auditor at their location, or field audits where the auditor visits your home or business. The chosen method depends on the complexity of the audit and the scope of the inquiry.

During the examination, the auditor reviews the submitted documentation against the reported financial information. They may compare income statements with bank deposits, verify expense deductions against receipts, or cross-reference information with third-party reports like W-2s or 1099s.

Auditors ask clarifying questions about specific transactions, sources of income, or claimed deductions. These questions may be posed in writing for mail audits or verbally during in-person meetings. Auditors may request additional documentation if the initial submission is insufficient or if new questions arise during their review.

Throughout this phase, maintaining clear and concise communication with the auditor is important. Providing prompt and accurate responses to inquiries helps move the process forward efficiently.

Understanding Audit Outcomes

Upon completion of the audit examination, the auditing agency will communicate its findings. There are generally three possible outcomes following the review of your financial records. The most favorable outcome is a “no change” letter, which indicates that the audit found no errors or adjustments were necessary, and your original filing remains as submitted.

Alternatively, the audit may result in a proposed adjustment, meaning the auditor identified discrepancies that could lead to additional tax owed or a reduction in a previously claimed refund. This finding is presented in an examination report, which details the proposed changes and the reasoning behind them. You will then have an opportunity to agree with the findings or appeal them.

In some instances, an audit might determine that you are due a refund if errors were found that resulted in an overpayment on your original filing. Regardless of the specific outcome, the agency will issue official correspondence outlining the final determination. This may take the form of a Notice of Deficiency if additional tax is proposed, or a final determination letter.