What If You Get Audited by the IRS?

An IRS audit reviews an individual’s or organization’s financial information to ensure reported data aligns with tax laws. Audits verify tax return accuracy, ensuring income is correctly reported and only legitimate deductions and credits are claimed. Receiving an audit notification does not automatically signify wrongdoing or errors. The IRS conducts audits to maintain the tax system’s integrity and promote voluntary compliance.

Receiving the Audit Notification

Taxpayers are notified of an IRS audit only by mail, never by phone, email, or social media. The initial contact is an official letter, which may include forms like IRS Letter 566, 2205, 3572, or 8303. The notice specifies the tax year(s) under examination, outlines items under review, and indicates the audit method: correspondence, office, or field. Upon receiving the notice, carefully read the letter to understand the audit’s scope. Verify its authenticity and note the response deadline. Resist contacting the IRS or sending documents without preparation. Instead, identify the specific tax issues mentioned in the letter.

Gathering Your Information

Preparing for an audit involves collecting documents and information that substantiate tax return claims and address issues in the audit notice. This includes income statements like W-2 and 1099 forms, which verify reported earnings. For deductions and expenses, gather receipts, canceled checks, and other proofs of payment, organized by category and date. Bank statements also corroborate deposits and withdrawals.

Beyond these general documents, specific situations may require additional records. For business expenses, ledgers, invoices, and detailed operational records are needed. A home office deduction requires documentation of utility bills, mortgage/rent payments, and repair costs. Records of retirement plan contributions, investment statements, and charitable contribution documentation are commonly requested. Medical and dental deductions may require medical savings account statements, physician bills, and records of capital improvements for medical purposes.

Organizing these documents logically, perhaps by tax year or by the specific issue being audited, can streamline the process. Creating a clear, concise summary or explanation for any complex transactions or unusual items on the return can also be beneficial. Accuracy and completeness are crucial when compiling this information, as missing or inconsistent details could prolong the audit. Engaging a tax professional, such as a Certified Public Accountant (CPA) or an Enrolled Agent, can help organize documentation, review accuracy, and ensure information is prepared. Their expertise can provide guidance and help protect taxpayer rights throughout the process.

Navigating the Audit Process

Once the necessary information is gathered, the audit proceeds according to the method specified in the initial notification.

Correspondence Audit

This most common type is conducted by mail, focusing on specific issues like missing documents or discrepancies. The IRS sends letters requesting information or clarification; taxpayers respond by mailing photocopies of requested documentation. If satisfactory, the audit may conclude with no changes.

Office Audit

This requires an in-person meeting with an auditor at an IRS office. These audits are more in-depth than correspondence audits and often involve discussing specific tax return items, such as itemized deductions or business income. The auditor may ask questions about financial position, employment, and lifestyle; provide only requested information to avoid expanding the audit’s scope.

Field Audit

This is the most comprehensive type, where an IRS agent visits the taxpayer’s home, business, or representative’s office to examine records. This audit type is typically for complex returns or businesses and may involve interviewing employees or touring facilities.

Taxpayer Rights During an Audit

Taxpayers possess specific rights, including the right to representation by a tax professional (tax attorney, CPA, or enrolled agent) who can speak on their behalf and help ensure rights are protected. Taxpayers also have the right to be informed about why the IRS is asking for information and how it will be used. They can request to record conversations with the IRS, provided advance notice is given. Maintaining a professional demeanor, providing only specifically requested information, and keeping detailed records of all communications with the IRS are important practices.

Understanding Audit Results and Your Options

After the audit concludes, the IRS informs the taxpayer of its findings.

Possible Outcomes

A “no change” letter, indicating the IRS agrees with the return as filed.
A “proposed change,” suggesting adjustments that may lead to additional tax owed or a reduced refund.
A determination that a refund is due.

If changes are proposed, the taxpayer receives a report detailing adjustments. If the taxpayer agrees, they can sign Form 870, “Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment,” to accept modifications.

Disagreeing with Findings

If the taxpayer disagrees, several options are available. They can request a conference with the auditor’s manager to discuss discrepancies. A more formal step is to request an appeal through the IRS Independent Office of Appeals. To initiate an appeal, a written protest must be submitted within 30 days of receiving the audit report. This protest should include:
The taxpayer’s name and address.
Tax periods involved.
A list of disputed issues.
Reasons for disagreement.
Supporting facts.
Any relevant legal authority.

For disputes exceeding $25,000, filing Form 12203 may be necessary to officially request an appeal. The Independent Office of Appeals is a separate IRS body that aims to resolve tax controversies impartially. If an agreement is not reached at the appeals conference, taxpayers retain the right to pursue further legal action in the U.S. Tax Court. Unlike other courts, a petition can be filed in Tax Court without first paying the disputed tax.