What Happens If the IRS Audits You?

An IRS audit is a review or examination of an individual’s or organization’s financial records to confirm the accuracy of information reported on a tax return. The Internal Revenue Service conducts these audits to ensure compliance with tax laws and to verify the correct amount of tax has been paid. Receiving an audit notice does not automatically mean there is a problem with your tax filing. Audits are part of the IRS’s broader role in maintaining the fairness and integrity of the tax system for all taxpayers.

Understanding the Audit Notification

An IRS audit typically begins with a notification sent through the mail. The IRS generally does not initiate audits by telephone. These notices, such as a CP2000, indicate that information received by the IRS from third parties, like employers or financial institutions, does not match what was reported on your tax return.

A CP2000 notice is not a bill but a proposed adjustment to your income, payments, credits, or deductions based on identified discrepancies. This notice will detail the amounts you reported, the amounts reported by the third party, and the proposed changes to your tax liability. It also includes a response form and a deadline for your reply within 30 days.

Other types of notices may indicate a more formal audit, requesting additional information or an in-person meeting. Regardless of the specific notice, it will identify the tax year(s) under review and the particular issues being questioned. Review the notice carefully to understand the specified response deadlines and avoid complications.

Preparing for the Examination

After receiving an audit notification, prepare for the examination by gathering all relevant financial records and documents that support the figures on your tax return. These documents may include W-2 forms, 1099 forms, receipts for expenses, bank statements, canceled checks, and investment records.

Understand the audit’s scope as outlined in the notification to focus on collecting only pertinent documents. For instance, if the audit concerns business expenses, gather ledgers, invoices, and receipts related to those operations. If a home office deduction is questioned, utility bills and mortgage or rent payments for the dedicated space would be relevant.

The type of examination dictates how you prepare and present information. A correspondence audit, the most common type, is conducted by mail and focuses on specific, less complex issues; mail copies of requested documents for this type. An office audit requires you to attend a scheduled meeting at a local IRS office, bringing all supporting documentation. A field audit, the most comprehensive type, involves an IRS agent visiting your home or business to examine a broader range of financial records. Organizing records by year and type of income or expense, with a summary of transactions, streamlines the process.

The Examination Process

Throughout the examination, be cooperative and provide all requested documentation. You have certain taxpayer rights, including professional representation by an attorney, Certified Public Accountant (CPA), or Enrolled Agent. You can also make audio recordings of interviews, provided you give the IRS advance notice.

The timeline for an audit examination varies. Correspondence audits are resolved within a few weeks to a few months. Office audits conclude within three to six months. Field audits, being comprehensive, can take several months or up to a year to complete. The IRS has three years from the date a return was filed or its due date, whichever is later, to initiate an audit. However, if a substantial error, such as a 25% understatement of income, is identified, the IRS may extend the audit period to six years.

Responding to Audit Findings

Following the examination phase, the IRS auditor will communicate their findings, which may include proposed changes to your tax liability. This communication typically comes in the form of a detailed examination report. At this point, you can either agree or disagree with the proposed adjustments.

If you agree with the findings, you will sign an agreement form, and the audit closes, with any additional tax owed becoming due. If you disagree, you can discuss your concerns with the auditor or their manager to seek a resolution. This initial discussion can sometimes clarify misunderstandings or lead to a revised outcome.

Should an agreement not be reached at the examination level, you have the right to appeal the findings to the IRS Office of Appeals. This independent administrative review process resolves tax disputes without litigation. To initiate an appeal, file a formal written protest within 30 days of receiving the audit findings. The protest letter should state your reasons for disagreement and provide supporting facts and documentation. The Office of Appeals will then schedule a hearing, which can be in person, by phone, or by mail, where an appeals officer will review your case impartially, aiming for a fair resolution.

Concluding the Audit

An IRS audit can conclude in several ways after examination and any appeals. One possible outcome is a “no change” result, meaning the IRS found no issues and accepted your return as filed. In such cases, the audit is formally closed without any adjustments to your tax liability.

If the audit results in proposed changes, you may owe additional tax or be due a refund. If additional tax is owed, the IRS will send a bill for the revised amount, which may include penalties and interest. Penalties can include an accuracy-related penalty, typically 20% of the understated tax, or a failure-to-file penalty (5% of the unpaid tax per month, up to 25%, for late returns). Interest accrues on the unpaid tax from the original due date until the amount is paid in full.

If a refund is due, the IRS will process it. If additional tax is owed and not paid voluntarily after the audit and any appeal options are exhausted, the IRS may initiate various collection procedures. These procedures can include placing a tax lien on property, garnishing wages, or seizing assets to satisfy the tax debt. Regardless of the outcome, the audit case is formally closed by the IRS.