What Happens If You Are Audited by the IRS?

An IRS audit is a review by the Internal Revenue Service of an individual’s or organization’s financial information and tax returns. It verifies the accuracy of reported income, deductions, and credits to ensure compliance with federal tax laws. While an audit can seem daunting, it is a routine part of tax administration and does not automatically imply wrongdoing. The IRS performs audits to maintain fairness and integrity within the tax system.

Receiving an Audit Notice

The IRS primarily initiates audits by sending an official letter through postal mail; they will not contact taxpayers by phone, email, or social media for initial audit notifications. This notice specifies the tax year and items under review, and the type of audit: correspondence, office, or field. Carefully read the notice and note any deadlines.

A correspondence audit is the most common type, conducted entirely by mail. These audits usually involve requests for clarification or documentation regarding specific items, such as deductions or credits. Taxpayers respond by mailing the requested documents.

An office audit requires an in-person meeting at a local IRS office. These audits involve more complex issues than correspondence audits, often focusing on itemized deductions, business profits or losses, or rental income and expenses. The notice lists the documents to bring. This audit type allows direct interaction with an IRS examiner.

The most comprehensive type is a field audit, where an IRS agent visits the taxpayer’s home, business, or representative’s office. These audits are for complex tax returns or businesses and involve a thorough examination of financial records on-site.

Preparing for an IRS Audit

Once an audit notice is received, understand the precise scope of the inquiry. The audit letter outlines the specific items or tax years the IRS is questioning. This helps focus efforts on gathering only necessary information.

Gather all relevant financial records, including receipts, invoices, bank statements, and electronic payment records that substantiate income, deductions, or credits. For business expenses, detailed ledgers and specific receipts are necessary. W-2s, 1099s, and K-1s are also needed to verify reported income.

Organize these documents systematically, by date or category, to streamline the audit process. Create clear copies for the IRS, always retaining originals. If records are missing, obtain duplicates from banks, employers, or other institutions.

Seeking professional assistance from a qualified tax professional, such as a CPA, Enrolled Agent, or tax attorney, is advisable. These professionals can interpret the audit notice, review documentation for completeness, and ensure compliance. They can also represent the taxpayer during the audit, communicating directly with the IRS and protecting taxpayer rights.

The IRS Audit Process

With preparation complete, interaction with the IRS auditor begins, varying by audit type. For a correspondence audit, submit requested documents by mail, adhering to deadlines in the notice. This requires careful assembly and mailing of supporting paperwork.

For an office audit, the taxpayer or representative meets with an IRS examiner at a designated office. Present organized documents for review. The auditor will ask questions to clarify tax return entries and examine evidence. Clear, concise communication is important; answer only the questions asked.

In a field audit, the IRS agent conducts the examination at the taxpayer’s home, business, or representative’s office. This involves a more extensive review, as the auditor may observe business operations or inspect records on-site. Scheduling the meeting at a representative’s office can minimize disruption, though the auditor may still wish to see the business location.

Throughout any audit, taxpayers have rights, including professional representation, privacy, and a fair examination. They also have the right to know why the IRS asks for information and to receive clear explanations of proposed changes. Audit duration varies, from weeks for correspondence audits to months for complex field audits. The IRS generally has three years from the filing date to assess additional tax.

Potential Audit Outcomes

Upon audit conclusion, the IRS communicates its findings, with several possible outcomes. A “no change” outcome means the original tax return is accurate and no adjustments are necessary. The taxpayer receives official notification that the audit is closed.

An “agreed change” occurs when the IRS proposes adjustments, and the taxpayer agrees. This may lead to additional tax owed, a reduced refund, or a larger refund. If agreed, the taxpayer signs an agreement form, formalizing the agreement and allowing the IRS to assess or refund the tax. Signing generally waives the right to contest the specific tax liability in Tax Court.

If no agreement is reached, the outcome is an “unagreed change.” The IRS typically issues a 30-day letter, outlining proposed adjustments and the right to appeal. If no response or agreement occurs, the IRS may issue a formal Notice of Deficiency. This notice states the IRS’s determination of additional tax owed and provides 90 days (or 150 days if outside the U.S.) to file a petition with the U.S. Tax Court.

Challenging Audit Results

If a taxpayer disagrees with audit findings, established procedures exist to challenge the results. The primary avenue within the IRS is the IRS Appeals Office. This office operates independently from the examination function, offering an impartial review. Taxpayers receive instructions for requesting an appeals conference in the 30-day letter.

During the appeals process, taxpayers present arguments and supporting documentation to an appeals officer, who evaluates the case based on tax law and facts. Many disputes resolve at this administrative level, potentially leading to a mutually acceptable settlement. Taxpayers can file a small case request for amounts up to $50,000, or a formal written protest for larger cases.

If no agreement is reached with the IRS Appeals Office, taxpayers can petition the U.S. Tax Court. This court specializes in tax cases, allowing taxpayers to dispute the IRS’s determination without paying the disputed tax beforehand. The Notice of Deficiency, or “90-day letter,” formally notifies the taxpayer of the opportunity to file a petition within a strict 90-day deadline. Missing this deadline can result in the IRS’s proposed deficiency becoming final.

While the U.S. Tax Court is the most common judicial path, taxpayers may also pursue their case in a U.S. District Court or the U.S. Court of Federal Claims. Unlike Tax Court, these venues generally require paying the disputed amount first and then suing for a refund. These avenues provide an independent judicial review of audit findings.