What Happens When You Get Audited by the IRS?

An Internal Revenue Service (IRS) audit is a review of an individual’s or organization’s financial information to confirm that the information reported on their tax return is accurate and in compliance with tax laws. The primary purpose is to verify that the correct amount of tax was reported and paid. The selection process for an audit can be based on a statistical formula that compares returns against norms for similar filings. An audit can also be triggered if your return involves transactions with other taxpayers who are currently being audited.

The Audit Notification and Types

The IRS initiates most audits by mail. This first contact will be a letter providing all necessary contact information, instructions, the tax year under review, and the issues that prompted the examination. It is important to respond promptly, as interest can accrue on any potential amount owed.

The most common type is a correspondence audit, which is handled entirely by mail. These audits focus on a few specific items on the tax return, like income or deductions. The IRS will request copies of documents such as receipts or bank statements to verify the information in question.

An office audit requires an in-person interview at a local IRS office. Conducted by tax examiners, these audits are focused on specific items but may cover a broader range of issues than a correspondence audit. You are expected to bring all requested documentation to this meeting for the examiner’s review.

The most comprehensive examination is the field audit, conducted by a revenue agent at the taxpayer’s home, place of business, or accountant’s office. Field audits are reserved for more complex returns, such as those involving high net worth. The scope can be extensive, potentially covering all aspects of the tax return.

Preparing for the Examination

Upon receiving an audit notice, your first step is to understand exactly what the IRS is questioning. The notice will contain a written request for the specific documents the agency needs to see, identifying the items on your tax return that are under review. It is best to gather all relevant records before the examination begins.

For income verification, the IRS will request documents to trace the income reported on your return to its source. You should be prepared to provide:

• Form W-2s from employers
• Form 1099s for miscellaneous income
• Schedule K-1s from partnerships or S corporations
• Bank statements that show deposits
• Records of sales or services rendered if you are self-employed

When business expenses are under review, records are needed to substantiate the claims. This includes:

• Receipts for purchases
• Canceled checks
• Bank or credit card statements showing business-related transactions
• An accounting ledger that categorizes these expenses

Specific deductions require particular documentation. For vehicle expenses, a detailed mileage log recording the date, purpose, and miles for each business trip is expected. For charitable contributions, you need donation receipts from the organizations, and for medical expenses, you need invoices and proof of payment.

As a general rule, keep records for three years from the date you filed your return. However, records should be kept for six years if you significantly underreported income and for seven years if you file a claim for a loss from worthless securities. For property, records should be kept until the period of limitations expires for the year in which you dispose of it, and indefinitely in cases of a fraudulent return or failure to file.

The Examination Process

The examination process varies by audit type. In a correspondence audit, you will mail the requested documents to an IRS examiner. The examiner will review them and may send another letter if further information is needed, continuing this communication until a determination is made.

An office audit is more interactive. The meeting begins with an interview where the examiner will ask questions about your financial situation to get a complete picture. Afterward, you will present your documents for review, and the examiner may ask clarifying questions.

A field audit involves an on-site review of your records at your business, home, or accountant’s office. The revenue agent will conduct an in-depth examination of documents and business operations. This process can take a full day or more depending on the return’s complexity.

During any examination, the auditor’s role is to gather facts and apply tax law to them. They will review your records to ensure you have properly reported income and claimed deductions. You will have the opportunity to explain your position and provide supporting evidence for the items on your return.

Understanding the Audit Results

At the conclusion of the examination, the IRS will present its findings, resulting in one of three outcomes. A “no change” result means the IRS accepted your tax return as filed. The audit is closed, and no further action is required.

An “agreed” result occurs when the IRS proposes changes and you agree with them. You will sign an examination report detailing the adjustments and will then receive a bill for any additional tax, penalties, and interest owed.

A “disagreed” result occurs when you do not agree with the changes proposed by the IRS. In this situation, you have the right to dispute the findings, which allows you to proceed to the appeals process.

The Appeals Process

If you disagree with the audit findings, you can request an appeal with the IRS Independent Office of Appeals. This step is initiated by the IRS’s “30-day letter,” which explains the proposed changes and your right to appeal. To request an appeal, you will need to file a formal written protest.

The appeals process is designed to resolve tax disputes without going to court. An appeals conference is an informal meeting where you present your case to an impartial appeals officer who has the authority to mediate and settle cases. This provides an opportunity to discuss the disputed issues and negotiate a settlement.

The goal of the conference is to reach a mutually acceptable resolution. The appeals officer considers the evidence from both sides and the “hazards of litigation”—the chances of either party winning in court. This process is the final administrative opportunity to settle the matter before you proceed to Tax Court.