What Is a Random IRS Audit and What to Expect?
A random IRS audit is often for data collection, not a sign of wrongdoing. Learn how the process works, from the initial notice to the final resolution.
An Internal Revenue Service (IRS) audit does not automatically imply wrongdoing. A random audit is a review of a taxpayer’s information that is not triggered by suspected errors, but is instead a research tool. These audits are part of the National Research Program (NRP), which gathers data on tax filing compliance. The information collected helps the IRS understand taxpayer mistakes and is used to create statistical models for measuring compliance, allowing the agency to use its resources more effectively.
The Selection Process for a Random Audit
The selection of a tax return for a random audit is driven by the National Research Program (NRP) and is statistically impartial to ensure the data is a valid representation of the taxpayer base. Every return filed has a chance of being selected, though the probability can vary by income level.
This random selection contrasts with the more common audit trigger, the Discriminant Information Function (DIF) system. The DIF score is a computer-generated number indicating the likelihood of errors by comparing a return to the norms of similar returns. A high DIF score increases the chance of an audit, while an NRP audit is based on a random selection.
Required Information and Documentation
Upon receiving an audit notice, review it carefully to understand its scope. The letter will specify the tax year and the exact items being examined, which dictates the documents you must provide. You should only provide the information requested by the IRS.
Income Verification
To verify your income, you will need to gather all relevant forms. It is important to ensure these match the income reported on your tax return, as discrepancies can be a point of focus. These documents include:
- W-2s from employers
- 1099 forms for miscellaneous income
- Schedule K-1s from partnerships or S corporations
Expense and Deduction Records
To substantiate expenses and deductions, a variety of records may be necessary. Bank and credit card statements can help verify payments, while canceled checks provide proof of specific transactions. Other required documentation includes:
- Receipts for business expenses
- Records of charitable contributions
- Documentation for medical expenses
- A detailed mileage log for business use of a vehicle, noting dates, purpose, and miles driven
Tax Credit Documentation
If you claimed tax credits, you must provide specific documentation. For education credits, this includes tuition statements and payment records. For childcare credits, you will need receipts and information about the care provider. The goal is to have a complete and organized file of evidence for every line item the IRS is questioning before any direct communication with the examiner.
Navigating the Audit Examination
The audit examination proceeds in one of three ways. The most common is a mail audit, conducted entirely through correspondence. You will receive a letter requesting specific documents, and you must mail copies back to the IRS. It is advisable to send copies, not original documents, and use a mailing service that provides tracking and delivery confirmation.
A more involved process is the office audit, where you are required to meet with an auditor at a local IRS office. The notification letter will specify the date, time, and location of the meeting. During the meeting, an examiner will review your records and ask questions about the items under review.
The most comprehensive examination is the field audit. In this scenario, an IRS revenue agent conducts the audit at your home, place of business, or your representative’s office. Field audits are reserved for more complex returns, such as those for a small business, and may involve a broader review of your financial records. The agent will provide a list of required documents in advance.
Understanding Audit Outcomes
An audit concludes with one of three possible outcomes. The first is a “No Change” result, which means the IRS accepts your tax return as it was originally filed and no further action is required.
The second outcome is “Agreed,” where the IRS proposes changes to your tax return, and you agree with them. This means you will owe additional tax, along with any applicable penalties and interest. You will be asked to sign an examination report to confirm your agreement and will receive instructions on how to make the payment.
The third outcome is “Disagreed,” which occurs when you do not agree with the auditor’s proposed changes. The IRS will then issue a formal report and a “30-day letter.” This letter explains your right to appeal the decision to the IRS Independent Office of Appeals, a step that must be initiated within 30 days.