What Happens If You Get Audited by the IRS?
Understand the IRS audit process. Learn what to expect and how to navigate each phase, from initial contact to resolution.
An IRS audit is a thorough examination by the Internal Revenue Service of an individual’s or organization’s financial records. The IRS conducts these reviews to ensure tax returns accurately reflect income, deductions, and credits, and that taxpayers comply with federal tax laws. The purpose of an audit is to verify the correctness of the reported tax amount.
Receiving the Audit Notification
The IRS notifies taxpayers of an audit through official mail, never by phone, email, or social media. This initial notice will be sent to the address on file and will identify the tax year being examined and the specific issues under review. Read this letter carefully and do not ignore it, as delayed responses can lead to complications.
Upon receiving an audit notification, taxpayers should identify the type of audit. The three main types are correspondence audits, office audits, and field audits. Correspondence audits, the most common, are conducted entirely by mail and focus on specific issues such as missing documentation or discrepancies in reported income or deductions. Office audits require the taxpayer to visit an IRS office for an in-person interview and review of records, for more complex issues like itemized deductions or business income. Field audits are the most comprehensive, involving an IRS agent visiting the taxpayer’s home, business, or accountant’s office for an in-depth examination of financial records.
The audit notice will also specify a deadline for responding, which is 30 days from the date of the letter. It will outline the necessary information or documents the IRS is requesting. Steps include reviewing the notice to understand the audit’s scope, noting all deadlines, and gathering any initial information requested. Contacting a tax professional can provide guidance during this initial phase.
Preparing for the Audit
Preparation is key when facing an IRS audit. Taxpayers need to gather and organize all documents and information relevant to the tax year(s) under examination. This includes income statements like W-2 forms and 1099s, receipts for all claimed expenses and deductions (such as business expenses, charitable contributions, or medical expenses), and bank and credit card statements to verify deposits and withdrawals. Prior year tax returns and other records supporting the figures reported are also important.
Organizing these documents systematically can streamline the audit process. An approach involves creating a master folder, either physical or digital, for the audit year, with subfolders categorized by income, expenses, and other financial activities. Documents should be sorted chronologically within each category, and receipts should be clearly labeled with what they support. Only copies of documents should be provided to the IRS, never originals.
Ensure all information provided is truthful and supported by documentation. Do not create new documents or guess at information if records are missing. If records are unavailable, efforts should be made to reconstruct them, and these attempts should be documented.
The Audit Examination Process
Once documents are prepared, the audit examination begins, varying based on the audit type. For correspondence audits, taxpayers mail the requested documents to the IRS. For office or field audits, the process involves a meeting with an IRS auditor. The initial contact letter proposes a time for an opening conference, which taxpayers should schedule, ideally with a tax advisor present.
During the examination, the auditor will review the submitted records and may ask questions to clarify information or request additional documentation. Taxpayers should answer questions directly and truthfully, but avoid volunteering excess information beyond what is specifically asked. Be polite and cooperative, but understand that the auditor’s role is to verify compliance, and taxpayers have rights, including the right to representation.
The duration of an audit can vary depending on its complexity and the taxpayer’s responsiveness. Correspondence audits can conclude within three to six months if information is provided promptly. Office audits take longer, ranging from three to six months. Field audits, being the most comprehensive, can last up to a year or more. The IRS aims to complete audits within 26 months of the return being filed or due, although the statutory period for assessment is three years from the filing date.
Audit Outcomes and Resolution
After the examination is complete, the IRS will inform the taxpayer of the audit’s conclusion. There are three outcomes: “no change,” “agreed change,” or “unagreed change.” A “no change” outcome means the IRS found no issues and accepted the tax return as filed. In an “agreed change” scenario, the IRS proposes adjustments to the tax liability, and the taxpayer agrees with these changes.
If the taxpayer agrees to the proposed changes, they will sign a form, such as Form 870, “Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment.” Signing this form allows the IRS to immediately assess and collect the additional tax without issuing a Statutory Notice of Deficiency. The taxpayer can then pay the amount due or arrange a payment plan.
If the taxpayer disagrees with the proposed changes, this results in an “unagreed change.” The taxpayer has the right to appeal the IRS’s findings. The IRS will issue a 30-day letter, detailing their position and proposed adjustments. The taxpayer can then request a conference with the IRS Appeals Office, a branch within the IRS that can resolve disputes without litigation.
Should an agreement not be reached at the Appeals level, or if the taxpayer chooses not to appeal, the IRS will issue a Statutory Notice of Deficiency, known as a “90-day letter.” This notice is sent via certified mail and notifies the taxpayer of the proposed tax deficiency. Upon receiving this notice, the taxpayer has 90 days to file a petition with the U.S. Tax Court to dispute the assessment before paying the tax. If no action is taken within this period, the assessment becomes final, and the IRS can begin collection procedures.