What Happens If You Are Audited? The Process Explained

A tax audit is an official review of an individual’s or organization’s financial records and tax returns by a tax authority. Its purpose is to ensure accuracy and compliance with tax laws, verifying that taxpayers have correctly reported income, claimed appropriate deductions, and paid the correct amount of tax. An audit does not necessarily indicate wrongdoing; it is a routine process that helps maintain the integrity of the tax system.

Returns are selected for audit through various methods. Some are chosen randomly. Others are initiated when computer systems flag discrepancies between information reported on a tax return and data received from third parties, such as employers or financial institutions. Specific deductions, significant changes in income, or involvement in certain types of businesses might also increase the likelihood of an audit.

Receiving the Audit Notification

Taxpayers are notified of an audit by mail, usually via certified mail. The notice will contain details regarding the audit, specifying the tax year or years being audited and the particular issues under examination. It will also outline the type of audit being conducted.

The most common type is a correspondence audit, handled entirely through mail and typically focusing on one or two specific items, such as certain deductions or income discrepancies. An office audit involves visiting a local tax office to meet with an auditor and discuss the return. These audits often address more complex issues like business income or itemized deductions. The most comprehensive type is a field audit, where a tax agent visits the taxpayer’s home, business, or representative’s office to conduct a thorough examination of financial records. Field audits are generally reserved for more intricate tax situations or significant discrepancies.

Gathering Information and Records

The tax authority will request specific documents to support the income, credits, and deductions claimed on your return. Commonly requested documents include income statements, such as Forms W-2 and 1099, and expense receipts. Bank statements, canceled checks, and other financial records that substantiate transactions are also frequently needed. For businesses, this can extend to cash books, ledgers, journals, and financial statements like profit and loss statements and balance sheets.

Organizing these documents systematically by year and type of income or expense is helpful. Gather all relevant information, even if not explicitly requested in the initial notice, as it may become necessary during the examination. Always send copies of documents, never originals, and retain the originals for your records.

Engaging with the Auditor

You have the right to representation by a qualified tax professional, such as an attorney, certified public accountant (CPA), or enrolled agent, who can communicate with the auditor on your behalf.

During the audit, whether through correspondence, an office visit, or a field examination, provide only the information and documents specifically requested by the auditor. Avoid offering unsolicited explanations or additional details that could broaden the scope of the audit beyond the initial issues. If you are unsure about a question, it is acceptable to state that you do not know the answer immediately and will obtain the information.

Taxpayers also have the right to privacy and confidentiality regarding their financial information. In some cases, you may have the right to record conversations with the auditor, provided you inform them beforehand.

Understanding Audit Outcomes

An audit can conclude with several possible outcomes. One common result is a “no change” outcome, meaning the tax authority accepts the return as filed without any adjustments. This occurs when all reviewed items are substantiated and no discrepancies are found.

Another outcome is a proposed change to the tax return. This typically means the audit findings indicate additional tax is due, or a previously claimed refund is reduced. The auditor will issue a report detailing their findings, explaining the reasons for the proposed adjustments and the additional tax, interest, and potentially penalties owed.

In some situations, an audit may result in a refund to the taxpayer. This happens if the audit uncovers an overpayment of taxes or identifies additional deductions or credits that were not initially claimed. The tax authority will provide written notification of the audit’s conclusion and any proposed changes.

Disputing Audit Results

If you disagree with the findings presented in the audit report, you can request an informal discussion with the auditor’s manager. This can sometimes resolve misunderstandings or factual disagreements.

If a resolution is not reached, you can file a formal appeal with the tax authority’s administrative appeals office. This office is independent of the examination division that conducted the audit. To initiate an appeal, you need to submit a written protest outlining your reasons for disagreement and providing supporting facts and legal arguments. This protest generally needs to be filed within 30 days of receiving the audit report.

After filing a protest, an appeals officer will be assigned to your case, and an appeals conference will be scheduled. This conference can be held in person, by telephone, or via video, providing an opportunity to present your case and discuss the issues with the appeals officer. The goal of the appeals office is to resolve disputes without litigation, and they have the authority to adjust or overturn audit findings. Mediation or other alternative dispute resolution methods may also be available to facilitate an agreement.