What Happens When You Get Audited by the IRS?

An IRS audit is a formal review of an individual’s or organization’s financial records and tax returns by the Internal Revenue Service. The purpose of an audit is to verify that income, expenses, and deductions are reported accurately and that the correct amount of tax has been paid. Audits are a standard part of the tax system and help ensure compliance.

Selection for an audit can occur for various reasons, including random sampling, statistical formulas that flag returns deviating from established norms, or discrepancies identified through data matching with third-party reports like W-2s and 1099s. Initial contact from the IRS regarding an audit will always be made through official mail, never via email, phone calls, or text messages. Any communication attempting to initiate an audit through these unofficial channels should be considered a scam and reported.

Types of Audits

The IRS conducts different types of audits, varying in scope and method. The three main categories are correspondence audits, office audits, and field audits.

Correspondence audits are the most common and least intrusive type, conducted entirely by mail. These audits address straightforward issues or minor discrepancies that can be resolved by providing specific documentation or explanations, such as verifying certain deductions or income. These audits often conclude within three to six months if the taxpayer responds promptly.

Office audits are more comprehensive and require the taxpayer to meet in person with an IRS tax examiner at a local IRS office. These audits cover a broader range of tax return items and are suitable for examining multiple issues or more complex deductions. The IRS initiates these audits within a year of the tax return being filed, and they conclude within three to six months. An office audit might be triggered by certain deductions, such as home office expenses or significant charitable contributions.

Field audits represent the most extensive and in-depth examination. An IRS revenue agent conducts these audits at the taxpayer’s home, business, or the office of their authorized representative, like a certified public accountant (CPA) or tax attorney. Field audits are reserved for complex tax returns, businesses, or high-net-worth individuals, often involving a thorough review of extensive financial records and a broader scope of issues. Field audits can take longer to complete, sometimes extending up to a year or more.

Receiving and Responding to an Audit Notice

Receiving an audit notice from the IRS is the official start of the examination process. This initial letter contains information about the audit. The notice will state the specific tax year being audited, the particular items on the tax return under examination, the type of audit being conducted, and the IRS contact person along with a deadline for response. Review this letter to understand the scope of the audit and to verify its legitimacy.

Upon receiving the notice, a taxpayer should read the specific documents and information the IRS is requesting. The requested documents often include receipts, invoices, bank statements, canceled checks, and previous tax returns, all of which should directly relate to the items being audited. Organizing these records by date and category is important.

Engaging a tax professional, such as a CPA, Enrolled Agent, or tax attorney, immediately upon receiving an audit notice is beneficial, particularly for office or field audits. These professionals can help interpret the audit notice, organize documentation, and communicate with the IRS on the taxpayer’s behalf. Their expertise helps navigate tax law complexities.

Initial communication with the IRS should adhere to the instructions in the audit notice. This might involve confirming receipt or requesting an extension. Responding promptly within the specified timeframe is important to prevent complications. Ignoring an audit notice can lead to the IRS making assumptions about proposed changes, potentially resulting in additional taxes, penalties, and interest.

The Audit Process and Your Rights

During the audit examination, interaction with the IRS varies based on the audit type. For correspondence audits, information is exchanged through mail. In office or field audits, interactions involve direct meetings with an IRS agent. Taxpayers should present requested documents, avoiding providing more information than specifically asked.

A tax professional can represent the taxpayer during the audit. An authorized representative, such as a CPA, Enrolled Agent, or tax attorney, can communicate directly with the IRS, attend meetings, and respond to inquiries. This representation ensures interactions are handled appropriately.

Taxpayers are afforded several rights throughout the audit process, known as the Taxpayer Bill of Rights. These rights include the right to be informed, ensuring clear explanations of the law and process. Taxpayers also have the right to professional representation. Other rights include privacy and confidentiality regarding financial information, and the right to appeal an audit decision. Taxpayers have the right to challenge the IRS’s position and provide additional documentation.

The standard statute of limitations for the IRS to audit a tax return is three years from the date the return was filed or its due date, whichever is later. This period can extend to six years if there is a substantial understatement of income (more than 25% of gross income). In cases of suspected fraud or failure to file a return, there is no statute of limitations. Taxpayers have the right to know when the IRS has finished an audit and the maximum amount of time the IRS has to challenge their tax position.

Audit Outcomes and Next Steps

Once the audit examination concludes, the IRS will communicate its findings. There are three possible outcomes: a “no change” result, an “agreed” result, or a “disagreed” result.

A “no change” outcome means the IRS has accepted the tax return as originally filed, and no adjustments are necessary. The audit process is closed, and the taxpayer does not owe any additional tax.

An “agreed” outcome signifies that the taxpayer concurs with the IRS’s proposed changes. This might involve an adjustment to the tax liability, potentially resulting in additional tax due or a refund. If a taxpayer agrees, they will be asked to sign an agreement form, such as Form 870 or Form 4549. Signing this form waives the right to contest the tax deficiency in Tax Court. Arrangements for payment, including installment agreements, can then be made for any additional tax owed.

A “disagreed” outcome occurs when the taxpayer does not agree with the IRS’s proposed changes. The taxpayer has the right to appeal the decision. The first step in the appeals process is to file a formal written protest within 30 days of receiving the IRS’s findings. This protest outlines the reasons for disagreement and provides supporting evidence.

The appeals process allows the taxpayer to present their case to an independent IRS Appeals Officer. The Appeals Officer reviews the evidence from both the taxpayer and the IRS. If an agreement cannot be reached, the taxpayer has the right to take their case to the U.S. Tax Court for a judicial review. Filing a petition with the Tax Court within 90 days of receiving a “Notice of Deficiency” is a next step when an agreement is not reached at the appeals level.