What Happens If Your Taxes Get Audited?

An IRS tax audit reviews an individual’s or organization’s financial records and accounts to confirm the accuracy of information reported on a tax return and ensure compliance with tax laws. Receiving an audit notice does not automatically imply wrongdoing; audits are a routine part of the tax system and can occur for various reasons, including random selection or statistical analysis.

Notification and Initial Steps

The IRS primarily notifies taxpayers of an audit through official mail, emphasizing that any phone calls, emails, or social media messages claiming to be an audit notification are likely scams. A genuine audit letter will typically arrive via certified mail and will include details about the tax year under examination, the issues being reviewed, and instructions on how to respond.

There are three main types of IRS audits. A correspondence audit is the most common and least intrusive type, conducted entirely through mail to request additional information or clarification on items. Office audits require an in-person meeting at an IRS office, usually for issues too complex for mail but not extensive enough for a field audit. Field audits are the most comprehensive, involving an IRS agent visiting the taxpayer’s home, business, or accountant’s office to conduct an in-depth examination of financial records.

Upon receiving an audit notice, carefully read the letter to understand its scope and the deadline for response. Ignoring the notice can lead to penalties and interest. Noting deadlines and understanding the requested information are important initial steps.

Preparing for Your Audit

Preparation for an audit involves gathering and organizing all necessary documentation related to the audited tax year and items questioned. This includes income statements, expense receipts, bank records, canceled checks, prior year tax returns, home mortgage statements, brokerage statements, retirement account records, and pay stubs. For those claiming a home office deduction, documentation of utility bills, mortgage or rent payments, and repair costs is important.

Organizing these documents logically is important. Keep copies of everything sent to the IRS and retain original documents. If certain records are missing, obtain duplicates promptly. The law generally requires taxpayers to keep records for at least three years from the date the tax return was filed, though for substantial errors or fraud allegations, the IRS can go back six years or even indefinitely.

Seeking professional assistance from a tax professional, such as a Certified Public Accountant (CPA), Enrolled Agent, or tax attorney, is beneficial during this preparation phase. These professionals can help understand the audit’s scope, assist in gathering and organizing documentation, and advise on appropriate responses. Their expertise helps ensure complete and accurate information, leading to a smoother audit.

During the Audit Examination

The audit examination varies depending on the type of audit. In a correspondence audit, the process occurs through mail, with the IRS sending requests for information and the taxpayer mailing back supporting documents. There are no in-person meetings or phone calls, and the interaction focuses on clarifying items.

For an office audit, the taxpayer attends an in-person meeting at an IRS office. During this meeting, an IRS examiner reviews the tax return and supporting documents. The taxpayer should bring all requested documentation, and it is advisable to have a tax professional present. The auditor may ask questions about income, deductions, and business operations.

A field audit, the most extensive type, involves an IRS revenue agent visiting the taxpayer’s home or business. The agent conducts an in-depth review of financial records, which can include examining bank statements, invoices, and ledgers. In business audits, the agent may also interview employees to understand operations and internal controls.

Taxpayers have specific rights during an audit, including the right to representation by a qualified tax professional who can communicate with the auditor on their behalf. Taxpayers also have the right to record the interview, provided they give proper advance notice to the IRS. Provide only information specifically requested by the auditor, and be cooperative without offering unnecessary details.

Possible Audit Results

Upon completion of the audit examination, the IRS will communicate its findings to the taxpayer. One possible outcome is a “no change” audit, meaning the IRS accepts the return as filed without any adjustments.

Another common outcome involves “proposed changes” to the tax return. These changes can result in additional tax owed, along with potential penalties and interest. Penalties might include those for accuracy-related issues or late payment. The IRS typically communicates these proposed changes through documents such as Form 4549, Income Tax Examination Changes, or a 30-day letter. Form 4549 details the proposed adjustments to taxable income, credits, and the corrected tax liability, including any penalties and interest.

While less common, an audit can also result in a refund if the IRS discovers that the taxpayer overpaid taxes. If the taxpayer agrees with the proposed changes, they generally sign and return the form by the due date and pay any additional tax due.

Disputing Audit Findings

If a taxpayer disagrees with the IRS’s proposed audit changes, several procedural steps are available. The first option is often to discuss the findings with the auditor’s manager to seek resolution. If an agreement cannot be reached at this level, the taxpayer has the right to appeal the decision.

The primary avenue for dispute is to request an appeal with the IRS Office of Appeals. This office is separate from the IRS division that conducted the audit, and its purpose is to provide an impartial review to resolve tax disputes without litigation. To initiate an an appeal, the taxpayer typically needs to submit a formal written protest within 30 days of receiving the audit decision letter, often referred to as a “30-day letter.” The appeals conference involves presenting the taxpayer’s case with supporting documentation and arguments to an appeals officer.

Should an agreement still not be reached at the appeals level, the taxpayer may petition the U.S. Tax Court. This step usually follows the receipt of a Notice of Deficiency, or “90-day letter,” which provides 90 days to file a petition with the Tax Court. While many cases settle before reaching trial, a Tax Court petition allows for a judicial review of the dispute. Other options for resolving disputes can include mediation programs like Fast Track Settlement, designed to expedite resolutions with the help of an Appeals officer as a mediator.