What Happens If I Get Audited by the IRS?

An IRS tax audit reviews an individual’s or organization’s financial records and tax return information. The goal is to ensure accuracy and compliance with federal tax laws, verifying the correct amount of tax has been reported and paid. Audits are a routine part of the IRS’s efforts to maintain tax system integrity and are not always an indication of wrongdoing, as returns can be selected for various reasons, including random selection.

Receiving an Audit Notification

The IRS initiates an audit by sending an official notification letter through the mail. This correspondence specifies the tax year or years under review and the particular issues the IRS wants to examine. The letter contains official IRS letterhead, your taxpayer identification number (such as your Social Security Number), and IRS contact information.

It is important to carefully examine the letter to confirm its legitimacy, checking for a notice number, a clear description of the audit’s purpose, and specific required actions. The IRS will never initially contact taxpayers about an audit via email, text message, or phone call. Ignoring an audit notice is not advisable, as it can lead to disallowed deductions or other negative consequences.

The notice also includes a deadline for your initial response, around 30 days from the letter’s date. If you are unsure about the authenticity of the notice, you can call the main IRS toll-free number, 1-800-829-1040, to verify the audit. This step helps protect against potential scams while ensuring you address genuine IRS correspondence promptly.

Preparing for the Audit

Preparing for an audit involves gathering and organizing all relevant financial information and supporting documents to substantiate the figures reported on your tax return. This includes income statements, such as Forms W-2 and 1099, which detail wages, independent contractor income, and other earnings.

Receipts for all claimed deductions and credits are necessary, including those for business expenses, charitable contributions, medical expenses, and itemized deductions. It is advisable to organize these receipts by category and date, with notes explaining their relevance to your tax return. Bank statements and canceled checks are also important, as they can verify deposits and withdrawals, ensuring all financial transactions are accounted for.

For business owners, detailed ledgers, invoices, and other operational records are essential. If you claimed a home office deduction, be prepared to show documentation of related expenses like utility bills or mortgage payments. Vehicle expense claims require records of gas, maintenance, and a log of business miles driven. Loan documents, property records, and prior tax returns should also be readily accessible.

The IRS recommends keeping tax returns and supporting documents for at least three years after filing. The statute of limitations extends to six years if you underreported income by more than 25%, and there is no time limit in cases of suspected fraud or if no return was filed. Organizing documents by tax year and type can streamline preparation. Seeking assistance from a qualified tax professional, such as a Certified Public Accountant (CPA) or an enrolled agent, can provide valuable guidance and ensure your records are complete and accurate.

Understanding the Audit Process

The IRS conducts audits in different ways. The most common type is the correspondence audit, conducted entirely by mail. This audit focuses on specific, straightforward issues like missing documentation or minor discrepancies. You will receive a letter requesting documents or clarifications, which you then mail back to the IRS.

An office audit requires you to meet with an IRS auditor at a local IRS office. These audits are reserved for more complex issues, such as detailed reviews of itemized deductions, business profits or losses, or rental income and expenses. During the audit, the auditor will ask questions and review your documentation. The meeting focuses on ensuring accurate income reporting and proper payment of taxes.

The most comprehensive type is the field audit, conducted by an IRS agent at your home, business, or tax professional’s office. Field audits are initiated for complex business returns or when the IRS suspects significant discrepancies across multiple areas of your tax return. This audit involves an in-depth review of financial records and can include interviews to clarify operations or specific transactions. The auditor will thoroughly examine your records.

During any audit, the auditor reviews your submitted documentation and may ask follow-up questions. The auditor’s role is to verify the accuracy of your reported income and expenses against tax laws. If the IRS is not satisfied or items do not reconcile, they may expand the audit’s scope. The process relies on your detailed and organized documentation.

Responding to Audit Results

After the IRS auditor completes their review, you will receive an audit report detailing their findings. The outcome can be a “no change” result or “proposed changes.” A “no change” outcome means the audit concluded with no adjustments to your tax return, indicating your original filing was accurate and fully substantiated.

Alternatively, the auditor may propose adjustments that could result in additional tax due, a refund, or changes to future tax liabilities. If you agree with the proposed changes, you can sign the audit report, Form 4549, “Income Tax Examination Changes,” and arrange for payment if additional tax is owed. Payment options include direct debit, credit card, or check.

If you disagree with the proposed changes, you have the right to appeal the decision within the IRS administrative appeals process. You can request a conference with an IRS Appeals Officer, who is independent of the examination division and will objectively review your case. To initiate this, you need to file a formal written protest or a small case request, depending on the amount of tax in dispute. This protest should outline your factual and legal arguments, supported by your documentation.

If an agreement cannot be reached at the administrative appeals level, you can pursue the matter in U.S. Tax Court. This involves filing a petition with the Tax Court within 90 days of receiving a Notice of Deficiency, a formal letter from the IRS stating the additional tax they believe you owe. Going to Tax Court allows an independent judge to hear your case, providing a formal resolution.