What Happens When the IRS Audits You?

When the Internal Revenue Service (IRS) conducts an audit, it undertakes a systematic review of an individual’s or organization’s financial information and tax returns. This process serves to ensure compliance with federal tax laws and verify the accuracy of reported income, deductions, and credits. Receiving an audit notice often signifies that certain items on a tax return were selected for review based on various criteria. The audit process is a standard procedure designed to uphold the integrity of the tax system.

Receiving the Audit Notice

An IRS audit typically begins with a formal letter mailed to your last known address, usually a CP2000 notice or an examination letter. This notice provides specific details about the tax year under review and identifies the particular items or areas of your return being questioned. It also outlines a deadline for your response, commonly around 30 days.

Upon receiving an audit notice, verify its authenticity, as the IRS primarily initiates audits via mail and generally does not make initial contact by phone. The notice will specify the documents and records the IRS requires to substantiate the questioned items. These might include receipts, bank statements, invoices, mileage logs, canceled checks, or official tax forms such as Forms W-2, 1099, or K-1. For instance, business expenses require detailed records to prove their legitimate business purpose. Similarly, charitable contributions of $250 or more must be substantiated with a written acknowledgment from the charitable organization.

Organizing these requested documents, whether in physical folders or digital files, ensuring clear labeling and easy accessibility. Promptly providing accurate and complete information helps facilitate a smoother audit process. If the scope of the audit appears complex or you feel uncertain about how to proceed, engaging a qualified tax professional, such as an Enrolled Agent (EA), Certified Public Accountant (CPA), or tax attorney, can help. These professionals can help interpret the notice, gather necessary documentation, and represent you in communications with the IRS.

Conducting the Audit

The IRS conducts audits through several methods. Correspondence audits are handled entirely by mail, where taxpayers submit requested documents directly to the IRS. This method is often employed for simpler issues, such as verifying specific deductions or income items, with the auditor reviewing the provided documentation against tax law to determine compliance.

For more involved examinations, an office audit may be scheduled, requiring the taxpayer to visit an IRS office. During an office audit, the taxpayer, or their representative, brings the previously organized records and discusses the questioned items with an IRS agent. The auditor’s role involves asking clarifying questions, examining the submitted evidence, and applying relevant tax code sections to the reported figures. These audits typically focus on one or two tax years and specific areas of the return.

Field audits represent the most comprehensive type of examination, where an IRS agent conducts the audit at the taxpayer’s home, business, or the office of their authorized representative. These audits are generally reserved for complex tax returns, such as those of businesses or high-net-worth individuals, and can involve a more extensive review of financial records and potentially multiple tax years. The auditor may interview personnel and perform a detailed scrutiny of books and records to confirm the accuracy of reported income and expenses.

Responding to Audit Results

After the IRS auditor completes their review of the submitted information, they will communicate their findings. This communication takes the form of a Notice of Proposed Adjustment (NOPA) or a Revenue Agent’s Report (RAR). These documents detail any proposed changes to your tax liability, outlining the reasons for the adjustments and specifying any additional tax, penalties, and interest that may be due. Penalties can include an accuracy-related penalty, often 20% of the underpayment, or failure-to-pay penalties.

If you agree with the proposed changes, you can sign Form 870. Signing this form allows the IRS to immediately assess and collect the additional tax, penalties, and interest, while waiving your right to formal appeal within the IRS system.

If you disagree with the IRS’s findings, you have the right to appeal. Request a conference with the IRS Appeals Office. This office operates independently from the examination division that conducted the audit, providing an opportunity for an impartial review of the disputed issues. The Appeals Office aims to resolve tax controversies without litigation.

Concluding the Audit Process

One outcome is a “no change” letter, indicating that the IRS has accepted your original tax return as filed, finding no adjustments necessary. This signifies that your reported income, deductions, and credits were fully substantiated and compliant with tax law.

If adjustments were proposed and you agreed to them, the audit concludes as an “agreed change.” In this scenario, you will receive a bill for any additional tax, penalties, and interest owed. Payment is due within a specified timeframe. If you are unable to pay the full amount immediately, you can explore payment options like an installment agreement or an offer in compromise (OIC) with the IRS. Conversely, if the audit resulted in an overpayment of taxes, the IRS will issue a refund.

For cases where no agreement is reached after the appeals process, the IRS will issue a Notice of Deficiency. This formal notice informs you of the IRS’s final determination and provides a 90-day window to petition the U.S. Tax Court if you wish to dispute the findings further. If a petition is not filed within this period, the tax assessment becomes final and legally collectible by the IRS.