When Does the IRS Notify You of an Audit?

The Internal Revenue Service (IRS) conducts audits to ensure the accuracy of information reported on tax returns and verify compliance with tax laws. An audit is a formal review of an individual’s or organization’s financial records and accounts. While receiving an audit notification can be unsettling, it does not automatically imply wrongdoing; audits are a routine part of tax administration designed to maintain the integrity of the tax system.

Methods of IRS Audit Notification

The IRS primarily notifies taxpayers of an audit by mail. Official audit notices are sent via the United States Postal Service, ensuring official communication. This method informs taxpayers their return has been selected and provides initial instructions.

Common initial audit notices include letters like the IRS Letter 566, which requests additional information on specific tax return items, or a CP2000 notice. A CP2000 notice is generated when there is a mismatch between income reported on a tax return and information the IRS received from third parties. While a CP2000 notice proposes changes to tax liability, it is an underreporter inquiry rather than a formal audit notification, though it often precedes further review. The IRS will not initiate an audit by telephone, email, or social media; any such contact should be considered suspicious. Taxpayers should verify the legitimacy of any IRS communication by checking IRS.gov or contacting the agency through official phone numbers.

Audit notifications can be received within three years after a tax return is due or filed, whichever is later. This is the general statute of limitations for the IRS to assess additional tax. Audits are often initiated within two years of filing. For example, a CP2000 notice typically gives taxpayers 30 days to respond, or 60 days if residing outside the U.S.

Reasons for IRS Audit Selection

The IRS selects tax returns for audit using computerized systems designed to identify potential discrepancies. Most returns are screened by programs like the Discriminant Information Function (DIF) system, which compares individual returns against statistical norms. Returns deviating significantly from these norms may be flagged for further review.

Several factors commonly act as “red flags” that can trigger an audit. These include mismatches between reported income and third-party statements like Forms W-2 or 1099. Unusually high deductions compared to income levels or similar taxpayers, large itemized deductions, or business expenses reported on Schedule C can also draw attention.

Consistent reporting of rounded numbers for income or expenses might suggest estimation rather than actual record-keeping. Additionally, complex transactions, such as those involving foreign accounts or significant capital gains and losses, or claiming certain tax credits like the Earned Income Tax Credit, can increase the likelihood of an audit. A small percentage of returns are also selected purely at random as part of the National Research Program (NRP) to gather data and update the IRS’s selection information.

Different Types of IRS Audits

Once a tax return is selected, the IRS conducts audits in several formats, varying in scope and interaction level. The most common and least intrusive is the correspondence audit, conducted entirely by mail. This type focuses on specific issues and requests supporting documentation for particular items on the tax return, such as income or deductions.

For more complex issues, the IRS may conduct an office audit. This involves a face-to-face meeting between the taxpayer and an IRS agent at a local IRS office. Office audits are often triggered by concerns like itemized deductions or business income and expenses, requiring a more detailed review than a correspondence audit.

The most extensive type is the field audit, where an IRS agent visits the taxpayer’s home, business, or representative’s office. Field audits are reserved for highly complex individual or business returns and involve an in-depth examination of financial records. These audits are generally more intrusive and time-consuming, as the agent may observe business operations and scrutinize a wide range of documents.

Immediate Actions After Notification

Upon receiving an official IRS audit notification, take timely action. First, carefully read the entire audit notice to understand the specific tax years under review, the issues identified, and the requested documentation. The notice will provide instructions and contact information.

Do not ignore the notice, as failure to respond within the specified timeframe, typically 30 days, can lead to further complications and penalties. Next, begin organizing and gathering all relevant records and supporting documentation requested. This may include receipts, invoices, and bank statements.

For office or field audits, or if issues are complex, consider seeking advice from a qualified tax professional, such as a Certified Public Accountant (CPA), Enrolled Agent, or tax attorney. These professionals can help interpret the notice, prepare a response, and represent the taxpayer during the audit process. It is advisable to avoid contacting the IRS or providing information prematurely before fully understanding the notice and preparing a comprehensive response, ideally with professional guidance.