What Happens If You Get Tax Audited?

An IRS tax audit involves a review of an individual’s or organization’s financial records and tax returns to ensure accuracy and compliance with tax laws. This routine process verifies reported information and ensures the appropriate tax has been paid. Audits can happen to any taxpayer and serve to uphold the integrity of the tax system.

Initial Audit Notification

A taxpayer receives notification of an audit through official mail from the Internal Revenue Service. This initial communication, often an IRS Letter 2000 or a similar official letter, provides key details about the upcoming examination. Ignoring this notice is not advisable, as a prompt response is expected.

The IRS conducts three types of audits: correspondence audits, office audits, and field audits. Correspondence audits are the most common and are handled entirely by mail, addressing specific, simpler issues that can be resolved with supporting documentation. Office audits require the taxpayer to meet with an IRS agent at a local IRS office for more complex issues such as itemized deductions or business expenses. Field audits are comprehensive, involving an IRS agent visiting the taxpayer’s home, business, or accountant’s office for an in-depth review of financial records.

The notification letter will specify the tax year or years being audited and outline the particular items under review. It will also include instructions for responding or a scheduled appointment date. This information helps the taxpayer understand the scope of the audit and prepare accordingly.

Gathering Information for an Audit

Preparation involves collecting and organizing relevant financial records for a tax audit. Commonly requested documents include proof of income, such as W-2 forms and 1099 forms, to verify reported earnings. Receipts for all claimed expenses, such as business, medical, and charitable contributions, are also needed.

Bank statements and canceled checks provide a comprehensive overview of financial transactions and can support income and expense claims. Loan documents, investment records like brokerage statements, and records related to retirement plan contributions may also be necessary depending on the audit’s scope. For self-employed individuals or businesses, detailed ledgers, invoices, and other operational records are required.

Before the audit interaction, it is beneficial to review your tax return against your gathered records to identify any potential discrepancies. This proactive review allows you to address or understand any differences before presenting the information to the IRS. Organizing these documents systematically, perhaps with summary sheets, can streamline the process and make it easier to respond to inquiries.

The Audit Process

Once the necessary documents are gathered, the audit interaction begins, varying based on the audit type. For correspondence audits, taxpayers mail the requested documents to the IRS by a specified deadline. Office and field audits involve direct interaction with an IRS examiner, either at an IRS office or at the taxpayer’s location.

During these interactions, the auditor reviews the submitted documentation and may ask clarifying questions to understand specific entries on the tax return. It is advisable to provide only the information explicitly requested by the auditor, maintaining clear and concise communication. Providing excessive or unsolicited details might unintentionally broaden the audit’s scope.

The timeline for an audit can vary depending on its complexity and the type of audit. Correspondence audits may conclude within a few months, often within three to six months if responses are prompt. Office audits wrap up within six months, while field audits, being extensive, can last a year or even longer, especially for complex business finances or multiple tax years. The IRS aims to complete audits within three years of the tax return’s filing date, though in cases of substantial error, they may go back up to six years.

Understanding Audit Results

The conclusion of an audit can lead to several possible outcomes. One favorable result is a “no change” outcome, meaning the IRS accepts the tax return as filed, and no adjustments are made. This indicates that the taxpayer successfully substantiated all reviewed items.

Alternatively, the IRS may propose changes to the tax return, which could lead to additional tax owed, a refund, or no change in tax liability due to offsetting adjustments. If the taxpayer agrees with these proposed changes, they will sign an agreement form. If an agreement cannot be reached, the IRS will issue a “30-day letter.”

The 30-day letter explains the proposed adjustments and informs the taxpayer of their right to appeal the findings within 30 days. If the taxpayer does not respond to the 30-day letter or an agreement still isn’t reached after the appeals process, a “90-day letter,” also known as a notice of deficiency, will be issued. This notice provides the taxpayer 90 days to file a petition with the U.S. Tax Court if they wish to formally dispute the deficiency without first paying the proposed tax.

Taxpayer Rights During an Audit

Taxpayers have specific rights that protect them throughout the audit process, collectively known as the Taxpayer Bill of Rights. These rights ensure fair treatment and due process when dealing with the IRS. One right is the right to be informed, meaning taxpayers are entitled to clear explanations of tax laws, procedures, and IRS decisions concerning their accounts.

Taxpayers also have the right to quality service, expecting professional and courteous treatment from IRS employees. They possess the right to pay no more than the correct amount of tax, ensuring that any assessed liabilities are accurate and legally due. Additionally, individuals have the right to challenge the IRS’s position and be heard, allowing them to present their case and provide supporting documentation.

Another right is the right to appeal an IRS decision in an independent forum, providing an avenue to dispute audit findings. Taxpayers are also afforded the right to privacy and confidentiality regarding their tax matters. Taxpayers have the right to retain professional representation throughout the audit, whether it’s an attorney, a Certified Public Accountant (CPA), or an Enrolled Agent (EA). This representation can handle communications, provide documentation, and advocate on the taxpayer’s behalf.