What Happens If You’re Audited by the IRS?

An IRS tax audit reviews a taxpayer’s financial information and tax returns for accuracy and compliance with tax laws. These examinations verify reported income, deductions, credits, and other financial data. Receiving an audit notification does not automatically indicate an error or wrongdoing. Instead, it is a mechanism used by tax authorities to maintain the integrity and fairness of the tax system. The process is designed to be systematic, involving specific steps from initial contact to resolution.

Receiving an Audit Notification

The IRS primarily notifies taxpayers of an audit through official mail. An audit notification letter typically specifies the tax year(s) under examination, the specific items or issues being reviewed, and the type of audit. The notice also provides initial contact information and instructions. It is important to carefully review the letter to understand the scope of the inquiry and any deadlines provided.

Upon receiving an audit notice, confirm its legitimacy. The IRS initiates audits via postal mail, not phone calls, emails, or social media. Ignoring an audit notice is not advisable, as it can lead to additional penalties or a default assessment. Taxpayers should note the response deadline, usually 30 days, and identify the specific areas the IRS intends to examine.

The notice identifies the audit type: correspondence, office, or field. A correspondence audit is conducted entirely by mail. An office audit requires a visit to an IRS office. A field audit, for complex cases, involves an auditor visiting the taxpayer’s home or business. Understanding the audit type helps prepare for subsequent steps and determines the required interaction.

Preparing for the Examination

Preparation for an IRS examination begins with reviewing the audit notice to understand the inquiry’s exact scope. The notice pinpoints specific tax forms, schedules, or line items questioned, allowing taxpayers to focus efforts. Identifying these areas helps gather only directly relevant information, preventing unnecessary document submission. Understanding the scope from the outset is a foundational step in managing the audit process effectively.

Gathering all relevant financial records and supporting documentation for the audited years and issues is a key phase. This documentation includes income statements, expense receipts, bank statements, canceled checks, loan documents, invoices, and mileage logs. For income verification, W-2 forms, 1099 forms, and other income reporting documents are essential. Previous tax returns for the audited years, and potentially preceding or subsequent years, may also be required to demonstrate consistency or carryforwards.

The IRS provides guidelines for record retention, which are important to follow. Generally, taxpayers should keep records supporting income, deductions, or credits for at least three years from the return’s filing date or two years from the tax payment date, whichever is later. For substantial income understatements (more than 25% of gross income), the retention period extends to six years. Records related to fraudulent or non-filed returns should be kept indefinitely.

Organizing these documents systematically is also a beneficial practice. Arranging records chronologically by tax year, then by category (e.g., income, deductions, expenses), can significantly streamline the examination process. Taxpayers can maintain physical files or convert paper documents into electronic images, provided the electronic storage system ensures accurate and accessible records. Digital copies offer ease of access and reduce physical storage needs.

Seeking professional assistance from a qualified tax professional is advisable during an audit. This includes a Certified Public Accountant (CPA), an Enrolled Agent (EA), or a tax attorney. These professionals possess expertise to navigate complex tax laws, understand IRS procedures, and advocate on the taxpayer’s behalf. Their involvement helps ensure only necessary information is provided and taxpayer rights are protected.

To allow a tax professional or another authorized individual to represent them, taxpayers can use IRS Form 2848. This form grants the representative authority to act on the taxpayer’s behalf, including discussing tax matters, receiving confidential information, and signing documents. If the taxpayer only wishes to authorize someone to inspect or receive confidential tax information without granting representation authority, IRS Form 8821 can be used.

Engaging with the Auditor

The interaction with an auditor depends on the type of audit initiated by the IRS. Each type of audit (correspondence, office, or field) has specific logistical considerations for the taxpayer.

During any audit interaction, maintain a professional and cooperative demeanor. Taxpayers or their representatives should provide only the information and documents specifically requested by the auditor. Volunteering additional, unrequested details can inadvertently broaden the audit’s scope. Clear and concise communication addresses auditor inquiries effectively.

Information exchange involves submitting prepared documents and responding to auditor questions. For correspondence audits, mail requested items by the deadline. In office or field audits, present documents and discuss questioned items with the auditor. Taxpayers or their representatives should be prepared to explain supporting documentation and the rationale behind their tax return positions.

The auditor will review submitted information and may ask follow-up questions or request additional documentation. Manage deadlines for providing information; extensions can be requested if more time is needed. Make such requests formally and in advance of the original deadline. Effective communication and timely responses contribute to a smoother audit.

Concluding the Audit Process

Once the auditor reviews all provided information and completes the examination, they communicate proposed findings to the taxpayer. This is typically done through a formal letter, such as a “30-day letter” or a Revenue Agent’s Report, detailing proposed changes to the tax liability. This document outlines adjustments, their reasons, and any resulting additional tax, interest, or penalties. Understanding these proposed changes is the first step toward resolution.

At this point, the taxpayer can agree or disagree with the auditor’s findings. If agreeing, they can sign a waiver, such as Form 870, to formally accept the changes. This leads to paying any additional tax and interest owed or receiving a refund if an overpayment is determined. Agreeing concludes the audit process quickly.

If the taxpayer disagrees with proposed changes, they have the right to appeal the findings. This typically involves filing a protest, a written statement outlining the taxpayer’s position and reasons for disagreement. The case may then be assigned to an IRS Appeals Officer, who is independent of the examination function and attempts to resolve the dispute impartially. The Appeals Office can consider litigation hazards for both parties, potentially leading to a settlement.

Should the administrative appeals process not result in an agreement, the IRS will issue a Notice of Deficiency, commonly known as a “90-day letter.” This formal notice informs the taxpayer of the final proposed tax deficiency and their right to petition the U.S. Tax Court within 90 days if they wish to dispute the liability without first paying the tax. Alternatively, taxpayers can pay the tax and then file a refund claim, which, if denied, allows them to sue in a U.S. District Court or the U.S. Court of Federal Claims.

Whether through agreement or appeal, the process concludes with a final determination of the tax liability. Any assessed tax, interest, or penalties become due at this stage. If the audit results in a refund, the IRS processes the payment to the taxpayer. Understanding these final procedural steps helps navigate the post-examination phase and brings the audit to a close.