What Happens If You Get Audited by the IRS?

An IRS audit reviews an individual’s or organization’s financial information, ensuring reported details align with tax laws and verify tax accuracy. Audits are a normal component of tax administration and do not automatically indicate wrongdoing. This article guides readers through the IRS audit process, from initial notification to potential outcomes and appeal options.

Receiving Notification

The IRS typically initiates an audit by sending notification through postal mail. A common letter is the CP2000 notice, generated when tax return information, such as income, does not match data the IRS has on file. More formal audit letters, like a CP75A, are sent for comprehensive examinations.

Audits fall into three categories. A correspondence audit, the most common, is handled by mail for simpler issues like income discrepancies. An office audit requires the taxpayer to visit a local IRS office for more complex issues. A field audit, the most comprehensive, involves an IRS agent conducting the examination at the taxpayer’s home, business, or accountant’s office, for intricate cases.

Upon receiving an audit letter, read it carefully to understand the specific tax year and issues. The letter specifies a response deadline, typically around 30 days. Ignoring the notification is not advisable, as timely communication is crucial. The letter outlines the documents and information the IRS is requesting, so promptly gathering these specific items is a necessary initial step.

Navigating the Audit Process

Once an audit is initiated by notification, the next phase involves responding to the IRS and navigating the examination. For a correspondence audit, conducted entirely by mail, the taxpayer must gather all requested documents and organize them carefully. Send copies of documents, not originals, to the IRS.

For office or field audits, preparation for the meeting is crucial. This involves organizing all requested documentation, reviewing issues in the IRS letter, and deciding whether to attend alone, with a tax professional, or to have a tax professional represent the taxpayer. If a taxpayer chooses professional representation, they grant authority using IRS Form 2848, which allows the representative to discuss tax issues and act on the taxpayer’s behalf.

During the audit, whether by mail or in person, interaction with the IRS auditor requires careful attention. Taxpayers should provide only the specific information requested and answer questions directly and factually. Volunteering additional, unrequested information is not recommended. The auditor’s role involves examining records and asking clarifying questions to verify the accuracy of the tax return.

As the audit progresses, the auditor may request additional information beyond the initial submission. Responding promptly and accurately to these subsequent requests helps ensure a smoother process. Upon concluding the examination, the auditor presents their findings and any proposed adjustments to the tax return.

Understanding Audit Outcomes

After the examination phase of an IRS audit concludes, several potential outcomes exist. A “no change” outcome signifies that the IRS agrees with the original tax return as filed, and no adjustments are required. This outcome indicates that the taxpayer has substantiated all reviewed items.

Another outcome is an “agreed” case, where the taxpayer concurs with the IRS’s proposed adjustments. This involves signing an agreement form, such as Form 870. By signing this form, the taxpayer consents to the immediate assessment and collection of any additional tax owed or to receive a refund, and waives their right to petition the U.S. Tax Court for those specific tax years.

If the taxpayer does not agree with some or all of the IRS’s proposed changes, the case is considered “unagreed”. The IRS will issue a “30-day letter,” formally known as Letter 950. This letter explains the proposed changes and informs the taxpayer of their right to appeal the decision within 30 days. The 30-day letter is a crucial step, providing an administrative opportunity to resolve the disagreement without escalating to litigation.

Should the taxpayer not respond to the 30-day letter or fail to reach an agreement with the IRS Appeals Office, the IRS will then issue a Notice of Deficiency, commonly referred to as a “90-day letter”. This formal legal notice provides the taxpayer with 90 days from the date of the notice to file a petition with the U.S. Tax Court to challenge the proposed tax assessment without first paying it. Failure to file a petition within this 90-day period forfeits the right to contest the IRS’s assessment in Tax Court, leading to collection actions.

Pursuing an Appeal

If a taxpayer disagrees with the findings of an IRS audit, they have the right to pursue an appeal. The IRS Appeals Office serves as an independent administrative body within the IRS, tasked with resolving tax disputes without the need for litigation. This office aims to reach a fair and impartial settlement between the taxpayer and the government.

To initiate an appeal, the taxpayer must generally file a formal written protest for cases involving proposed additional tax over a certain threshold, such as $25,000 for office or field audits. This protest, typically due within 30 days of the 30-day letter, should include the taxpayer’s name, address, the tax periods involved, a copy of the IRS letter showing the proposed changes, a detailed list of disputed issues, facts supporting the taxpayer’s position, and any relevant law or authority. For smaller cases, a small case request can be submitted, which does not require a formal written protest.

After submitting the protest or small case request, the taxpayer or their authorized representative will typically have a conference with an Appeals Officer. This conference provides an opportunity to discuss the case, present supporting documentation, and attempt to reach a mutually agreeable settlement. The Appeals Officer will review the evidence provided by both the taxpayer and the IRS, considering the hazards of litigation that might exist if the case were to proceed to court.

If an agreement is reached during the appeals conference, the case is closed, and the taxpayer signs the appropriate settlement forms. If no agreement can be reached, the taxpayer still retains the option to pursue the matter in U.S. Tax Court, having preserved their right to do so by engaging in the appeals process. The appeal process is generally less formal and less costly than litigation, offering a valuable opportunity for resolution.