When You Get Audited by the IRS, What Happens?

An IRS audit is a review of an individual’s or organization’s financial records and tax returns. Its purpose is to ensure the accuracy of reported information and compliance with federal tax laws. Understanding the process can help taxpayers navigate it more effectively, from initial notification to potential outcomes.

Receiving an Audit Notification

The Internal Revenue Service (IRS) initiates audits by mail. This is the primary contact method, and taxpayers should be wary of phone calls, emails, or social media messages claiming to be from the IRS, as these are scams. Common notification letters include forms like CP2000, which addresses discrepancies between reported income and IRS records, or a Letter 566 for correspondence audits.

Do not ignore an audit notification, as this can lead to complications. The letter specifies the tax year(s) being examined, issues under review, and a response deadline. Before acting, verify the letter’s authenticity by checking the IRS website or contacting the IRS using official numbers, not those provided in suspicious communications.

Note the response deadline and carefully review the letter to understand the requested information. Do not send documents immediately unless specifically requested and verified. Consider seeking professional tax advice early, as a tax professional can help interpret the notice and determine next steps.

Understanding the Audit Process

IRS audits vary in scope and setting, tailored to the complexity of issues under review. Understanding the audit type provides insight into the examination phase. The IRS aims to verify correct tax reporting, and not every audit indicates an error or dishonesty.

The most common type is the correspondence audit, conducted entirely by mail. These audits focus on specific issues like math errors, missing information, or particular deductions. Taxpayers are asked to mail in supporting documents or clarifications to resolve the matter.

A more in-depth office audit requires the taxpayer or their authorized representative to meet with an IRS auditor at a local IRS office. These audits involve issues like itemized deductions or small business income and may include questions about financial activities.

The most comprehensive audit is the field audit, conducted at the taxpayer’s home, business, or accountant’s office. Field audits are typically reserved for complex individual or business returns, involving an extensive review of financial records and interviews. An IRS revenue agent performs these detailed examinations.

Navigating the Audit Examination

Once an audit is initiated, the examination phase requires careful preparation and communication. Gather all relevant financial records that support the income, deductions, or credits questioned by the IRS. This includes receipts, invoices, bank statements, canceled checks, and tax forms. Organizing these records systematically can streamline the review process for both the taxpayer and the auditor.

Maintain a clear, concise, and professional demeanor when communicating with the auditor. Provide only the information and documents specifically requested, avoiding extraneous details that could expand the audit’s scope. The IRS generally requests documents via Form 4564, an Information Document Request (IDR). Prompt and complete responses are advisable.

Taxpayers possess fundamental rights throughout the audit process, outlined in the Taxpayer Bill of Rights. These rights include:
The right to be informed about tax laws and IRS procedures.
The right to quality service.
The right to pay no more than the correct amount of tax.
The right to challenge the IRS’s position, provide additional documentation, and appeal decisions in an independent forum.
The right to representation by an authorized professional, such as a tax attorney or certified public accountant, during interactions with the IRS.

For office and field audits, the meeting with the IRS auditor involves reviewing submitted documents and addressing questions. Having a representative present can help ensure discussions remain focused and taxpayer rights are upheld. Confirm the specific format for document submission with the auditor.

Responding to Audit Outcomes

After the auditor completes their review, the IRS issues a report detailing findings and proposed changes to the tax return. This report, often Form 4549, “Income Tax Examination Changes,” summarizes proposed adjustments to income, deductions, and credits, along with any associated penalties or interest. The form outlines the corrected tax liability and the balance due or refund amount.

If a taxpayer agrees with the proposed changes, they typically sign the agreement form, such as Form 4549, and pay any additional tax, penalties, and interest owed. Signing this form waives the right to appeal the findings within the IRS. If the taxpayer cannot pay the full amount immediately, payment options like installment agreements are available.

If a taxpayer disagrees with the audit findings, several avenues for recourse exist. Discussions can be held directly with the auditor or their manager to present additional information or clarify points. If an agreement is not reached, the taxpayer has the right to pursue a formal appeals process within the IRS. This involves filing a protest, usually within 30 days of receiving the audit report, to the independent IRS Office of Appeals. The Appeals Office aims to resolve disputes without litigation, and an appeals officer, separate from the original audit team, will review the case.

If a resolution is not achieved through the IRS Appeals Office, taxpayers may petition the U.S. Tax Court. This is a formal legal proceeding where a judge reviews the case. Generally, the tax does not have to be paid to appeal within the IRS or to the Tax Court. Penalties, such as accuracy-related or failure-to-file penalties, may be applied to underpayments, and interest accrues on unpaid tax and penalties from the original due date.