What to Do When You Get Audited by the IRS

An IRS audit reviews an individual’s or organization’s financial information to ensure it aligns with tax laws. This routine process verifies the accuracy of tax returns. An audit does not imply wrongdoing; it’s a part of the system the IRS uses to maintain the integrity of the tax system and ensure compliance.

Its purpose is to confirm reported income, deductions, credits, and other financial details. While audits can create apprehension, approaching the process with accurate records and understanding it helps resolve issues efficiently. The IRS aims to make the audit process straightforward, focusing on factual verification.

Decoding Your Audit Notice

An audit begins with a notice from the IRS. Review this letter carefully to understand its contents and requirements. The notice will specify the tax year or years under examination and the particular items or issues the IRS is scrutinizing, such as certain deductions, reported income, or credits.

Several types of notices indicate an audit. A CP2000 notice is sent when there’s a discrepancy between your reported income and what third parties reported to the IRS, proposing adjustments. A CP2501 notice is similar but typically requests clarification on discrepancies rather than proposing an immediate balance due. For more formal audits, taxpayers might receive examination letters such as Letter 2205, which explicitly state that a return has been selected for examination.

Notices outline the audit type:
Correspondence audit: Handled by mail for minor issues or document requests.
Office audit: Requires a visit to an IRS office with specific documents.
Field audit: Most comprehensive, an IRS agent visits your home, business, or accountant’s office.

The notice provides a response deadline (usually 30 days) and contact information for the IRS agent. Timely response is expected.

Organizing Your Records

After receiving an audit notice, gather and organize all relevant financial records and documentation. This preparation is important for substantiating the information reported on your tax return. The audit notice will generally specify the items or areas under examination, guiding which documents are needed.

For income verification, retain all W-2 forms, 1099 forms (such as 1099-MISC for freelance income or 1099-INT for interest), and bank statements that show deposits. If the audit pertains to deductions or credits, gather corresponding receipts, invoices, canceled checks, and other proof of payment. This could include medical bills, charitable contribution acknowledgments, mileage logs, or loan documents. For business-related audits, maintain business receipts, expense reports, profit and loss statements, and asset depreciation records.

Accuracy and completeness are important during this phase. Organize these documents systematically, perhaps chronologically or by category, and create a summary sheet or index for easy reference. Always make copies of all documents you intend to submit to the IRS and retain the originals for your records. If certain records are missing or incomplete, consider alternative forms of proof that can support your claims, such as bank statements or credible third-party affirmations. Before any interaction with the auditor, review your own tax return and the supporting documents thoroughly to understand your position and identify any potential areas of concern.

Communicating with the Auditor

After preparing your records, the next phase involves direct communication with the IRS auditor. The communication method depends on the type of audit.

During all communications, maintain a professional and polite demeanor. Answer all questions truthfully, but limit your responses to the specific information requested. Avoid volunteering unnecessary details or speculating beyond the facts presented in your records. Keeping a detailed log of all interactions is important, including dates, times, the names of IRS personnel, and a summary of discussions and documents exchanged.

Taxpayers have specific rights during an audit, outlined in IRS Publication 1, “Your Rights as a Taxpayer”. These include the right to be informed, the right to quality service, and the right to retain representation.

You can choose to have a qualified tax professional, such as a Certified Public Accountant (CPA), an Enrolled Agent (EA), or an attorney, represent you. This representative can communicate directly with the IRS on your behalf, which can be advisable for complex audits or if you feel uncomfortable handling the communication yourself.

Navigating Audit Outcomes

After examining your records and communicating with the auditor, the audit process moves towards a conclusion with several possible outcomes. The IRS may determine that no changes are needed to your tax return, resulting in a “no change” letter. Alternatively, the audit might result in an “agreed change,” meaning you concur with the IRS’s proposed adjustments, which could lead to additional tax due or, in some instances, a refund. If additional tax is owed, the notice will provide instructions on how to make the payment.

If you disagree with the proposed changes, this leads to a “proposed change” outcome. You have the right to challenge the IRS’s findings. The first step typically involves discussing your disagreement with the auditor’s manager to see if a resolution can be reached informally.

If an agreement is not met, the IRS will issue a 30-day letter explaining your appeal rights. This letter provides approximately 30 days to file a formal protest with the IRS Office of Appeals.

The IRS Office of Appeals is an independent body within the IRS that aims to resolve tax disputes without litigation. If an agreement cannot be reached at the appeals level, the IRS will issue a Notice of Deficiency, often referred to as a 90-day letter. This notice gives you 90 days (150 days if you are outside the United States) to file a petition with the U.S. Tax Court if you wish to dispute the proposed tax deficiency in court. Understanding these procedural steps and your rights is important before making decisions on audit findings.