What Happens if I Get Audited by the IRS?

An IRS audit involves a review of an individual’s or organization’s financial records and tax returns to confirm accuracy and compliance with tax laws. An audit does not inherently suggest wrongdoing; the IRS selects returns for various reasons, including random selection, computer screening, or issues related to other audited taxpayers.

Receiving the Audit Notification

The IRS notifies taxpayers of an audit exclusively by mail. Any contact via phone, email, or social media claiming to be an initial audit notification is likely fraudulent. The official letter specifies the tax year under review and the items being examined.

Notices may initiate an audit or relate to discrepancies. A common notice is the CP2000, an underreporter inquiry sent when income or payment information reported by third parties does not match what the taxpayer reported on their return. The CP2000 notice is not a bill but a proposal to adjust income, payments, credits, or deductions, potentially leading to additional tax or a refund. Other notices may directly inform taxpayers of an impending audit meeting.

Audits fall into three primary categories. A correspondence audit, the most common and least intrusive, is conducted entirely by mail and addresses straightforward issues like missing documentation or calculation errors. An office audit requires the taxpayer to meet with an IRS representative at a local IRS office for complex issues related to itemized deductions, business profits/losses, or rental income/expenses. A field audit is the most comprehensive, involving an IRS auditor visiting the taxpayer’s home, business, or representative’s office for an examination of financial records.

Preparing for the Audit

Upon receiving an audit notification, reviewing the notice is an important first step to understand the scope of the examination. The notice details the specific information the IRS wants to examine and any supplementary documents required. Respond within the suggested timeframe, 30 days, to prevent further interest accrual if taxes are eventually owed.

Gathering and organizing all relevant financial documents is necessary. This includes tax returns from the audited year and prior years, W-2s, 1099s, and other forms that verify reported income. For expenses and deductions, receipts, invoices, canceled checks, and bank statements are important. Business owners should compile ledgers, invoices, and other operational records. Investment records, home mortgage statements, and retirement account records are relevant depending on the audit’s focus.

When preparing documents, provide only copies to the IRS, never originals. Creating a summary sheet to accompany the materials helps the taxpayer respond to questions and facilitate the auditor’s review. Understanding the tax laws relevant to the audited items is beneficial, as this knowledge allows the taxpayer to articulate their position effectively. If uncertainties arise or the audit appears complex, seeking assistance from a tax professional is advisable.

Navigating the Audit Meeting or Correspondence

Once preparation is complete, interaction with the IRS takes place. For correspondence audits, the process involves submitting requested documents and explanations by mail. The IRS reviews the submitted information and may follow up with additional inquiries.

For office and field audits, the interaction occurs in person. During these meetings, the auditor asks questions and reviews the provided documentation. It is advisable to provide only the information and documents specifically requested by the auditor. Taxpayers have several important rights during an audit, including the right to representation by a tax professional who can speak on their behalf.

Taxpayers also have the right to record the interview, provided they notify the IRS auditor in advance. Taxpayers have the right to appeal any audit findings with which they disagree. Understanding these rights helps ensure fair treatment throughout the audit process.

Understanding Proposed Changes and Your Options

After reviewing the submitted information or conducting an interview, the auditor presents their findings. These findings are detailed in a report, such as IRS Form 4549, which outlines proposed adjustments to taxable income, corrected tax liability, and any calculated penalties and interest.

Several outcomes are possible. The audit might conclude with “no change,” meaning the IRS accepts the return as filed without adjustments. Alternatively, the auditor may propose changes resulting in additional tax due or a refund. If the taxpayer agrees with the proposed changes, they can sign an agreement form, such as Form 870 or the second page of Form 4549. Signing Form 870 allows for the immediate assessment and collection of tax without further delay, though it does not prevent the taxpayer from later filing a claim for refund.

If the taxpayer disagrees with the proposed changes, they have options to dispute the findings. They can request a conference with the auditor’s manager to discuss unresolved issues. If a resolution is not reached, the taxpayer can initiate the appeals process. This involves filing a written protest within 30 days of receiving the audit findings, detailing the items of disagreement and supporting facts or legal authority. The IRS Office of Appeals is an independent body that aims to resolve tax disputes without resorting to court.

Finalizing the Audit and Post-Audit Steps

When the audit concludes, either by agreement or through the appeals process, the final steps involve settling any outstanding tax liabilities or receiving refunds. If additional tax is due, the taxpayer must pay the amount, which may include interest and penalties. One common penalty is the accuracy-related penalty under Internal Revenue Code Section 6662, which imposes a 20% penalty on the underpayment attributable to negligence, disregard of rules, or a substantial understatement of income tax. This penalty applies if the taxpayer fails to make a reasonable attempt to comply with tax laws or keep adequate records.

If an appeal was pursued and a settlement was reached, the terms of that agreement finalize the audit. If the audit or appeal results in a refund, the IRS issues the refund to the taxpayer.

The IRS has 10 years to collect assessed tax debts, starting from the date the tax is assessed. This 10-year collection statute of limitations can be suspended under certain circumstances. While an audit covers specific tax years, the IRS can audit different tax years in the future, with the statute of limitations for auditing a return being three years from the later of the return’s due date or filing date.