What Happens When You Get Audited and What to Do Next
Gain a comprehensive understanding of the tax audit process. Learn how to approach each stage with clarity and composure, from notice to conclusion.
An IRS tax audit represents a formal review of a taxpayer’s financial information and tax returns. This process aims to ensure that reported income, deductions, credits, and other financial details align with tax laws and regulations. While the prospect of an audit can seem daunting, it is a standard procedure the IRS undertakes to verify accuracy and compliance across various taxpayers, including individuals and businesses. The IRS conducts audits for various reasons, sometimes based on statistical formulas or discrepancies found in submitted returns.
Receiving an Audit Notice
An IRS audit notice typically arrives via certified mail, indicating its official nature. This notice will clearly state the tax year under examination, the specific items or reasons for the audit, and outline the initial information or documentation required, specifying a deadline for your response.
Upon receiving an audit notice, it is important to avoid ignoring it, as delays can lead to accumulating interest or penalties. Immediately verify the notice’s legitimacy; the IRS will not initiate an audit via phone call or email. Carefully read the entire notice to understand the precise scope of the inquiry, noting the response deadline and the specific documentation requested.
Understanding the Audit Process
The IRS conducts different types of audits, each varying in scope and interaction method. The most common is the correspondence audit, handled entirely by mail. These audits typically address minor issues or simple errors on a tax return, such as questions about charitable donations or home office expenses, and often involve a request for additional documentation.
Another type is an office audit, which involves an in-person meeting with an IRS agent at a local IRS office. These audits usually focus on specific aspects of a tax return, such as itemized deductions or business income and expenses. The notification for an office audit comes by mail, inviting the taxpayer to schedule a meeting and outlining the documents to bring.
The most comprehensive type is a field audit, where an IRS revenue agent conducts the examination at the taxpayer’s home, business, or representative’s office. Field audits are typically reserved for more complex tax returns or situations where the IRS suspects significant discrepancies. The agent may observe business operations and interview the taxpayer or employees.
Preparing for the Audit
Preparing for an audit involves gathering specific financial information and documentation to substantiate claims on your tax return. Common documents requested include income statements like W-2 forms and 1099s, pay stubs, and expense records such as receipts, invoices, and canceled checks for business expenses, charitable contributions, and medical deductions. For investments, brokerage statements are necessary.
Organize these documents systematically, perhaps by tax year and category, ensuring all records are legible and complete. Provide only copies of documents to the IRS, retaining your originals. Before any interaction, review your tax return and all supporting documents to identify any potential discrepancies.
If you claim specific deductions, like home office expenses or vehicle use, detailed logs and supporting bills are needed. A mileage log detailing dates, destinations, and business purposes helps substantiate vehicle expenses. For a home office, utility bills, rent or mortgage payments, and records of repairs and maintenance are needed.
During the Audit and Responding to Inquiries
Once your documents are prepared, submit them as indicated by the audit notice. For correspondence audits, documents are typically mailed to the IRS address provided in the notice. For office or field audits, you or your representative will present the documents during the scheduled in-person meeting. Some interactions may also involve online portals for secure document submission.
During interactions with the auditor, it is important to be honest and concise in your responses. Answer only the questions asked, avoiding unnecessary details or speculation that could broaden the scope of the audit. You have the right to professional representation by an attorney, Certified Public Accountant (CPA), or Enrolled Agent (EA) throughout the audit process. These professionals can communicate with the auditor on your behalf, clarify complex tax laws, and protect your rights.
If you initially face the auditor alone but decide you want representation, you have the right to stop the interview and reschedule it with your chosen professional present. The auditor will review your documentation and may ask follow-up questions or request additional information to clarify items on your return. Providing organized and complete responses helps facilitate a quicker resolution.
After the Audit Conclusion
The IRS will communicate the audit’s findings. There are generally three possible outcomes: a “no change” letter, meaning your return is accepted; agreed-upon changes, which may result in a refund or additional tax owed; or proposed changes with which you disagree. If you agree with the proposed adjustments, you will typically sign Form 870, formalizing the agreement.
If you disagree with the IRS’s proposed changes, you have the right to appeal the decision. The IRS will send you a letter, often a 30-day letter, explaining your appeal rights. For disputed amounts of $25,000 or less per tax period, you can file a “Small Case Request” using Form 12203, along with a brief written statement outlining your disagreements. For larger or more complex disputes, a formal written protest may be required.
The appeal process involves an independent review by the IRS Independent Office of Appeals, which aims to resolve tax controversies without litigation. An Appeals Officer, who was not involved in the original audit, will review your case impartially, considering both your arguments and the IRS’s position. If an agreement is not reached at the appeals level, you may take your case to the United States Tax Court, the U.S. Court of Federal Claims, or a U.S. District Court.