Receiving an IRS audit notice can be unsettling. Many taxpayers immediately assume that an audit means they are accused of cheating on their taxes or that they are going to face a large financial penalty. In reality, an IRS audit is generally an examination of information reported on a tax return to determine whether the return is accurate and complies with federal tax law.
An audit does not automatically mean that you did anything wrong. However, it is important to take the process seriously. Ignoring an audit notice, missing deadlines, or failing to provide requested documentation can make an already stressful situation more difficult.
Understanding how IRS audits work, what rights taxpayers have, what documents may be requested, and when professional representation may be appropriate can help you navigate the process more effectively.
What Is an IRS Tax Audit?
An IRS audit is a review of a taxpayer’s financial information and tax return to determine whether the information reported is correct.
The IRS may examine items such as income, deductions, credits, business expenses, investment transactions, or other information reported on a federal tax return.
An audit can be triggered for several reasons. The IRS uses automated systems and other methods to identify returns that may require additional review. An issue may also arise because information reported by a third party does not match what appears on a taxpayer’s return.
For example, if an employer reports wages that are different from the wages listed on a taxpayer’s return, the discrepancy may attract IRS attention.
Being selected for an audit does not necessarily mean that the IRS believes you intentionally violated the law.
How Will You Know You Are Being Audited?
The IRS generally begins an audit by contacting the taxpayer.
If the IRS is requesting an examination of your return, you should carefully review the official notice you receive. The notice should identify the tax year involved, explain why the IRS is contacting you, and provide instructions about what you need to do.
Do not ignore the letter.
The notice should also provide information about how to respond and where to send requested documentation.
Be cautious about unexpected emails, text messages, or phone calls claiming that you are being audited and demanding immediate payment. Tax-related scams frequently use threats and urgency to trick consumers into providing money or personal information.
If you are unsure whether a communication is genuine, verify it using official IRS resources rather than relying on contact information supplied by a suspicious message.
Why Does the IRS Conduct Audits?
There is no single reason why a taxpayer may be selected.
The IRS can select returns for examination because of mathematical errors, information discrepancies, unusual items, specific issues involving deductions or credits, or other factors.
The agency also uses information from tax documents submitted by employers, financial institutions, businesses, and other third parties.
For example, a taxpayer may report a certain amount of investment income while a financial institution reports a different amount. The discrepancy could lead the IRS to request additional information.
An audit can also involve a business return where the IRS wants to examine expenses, income, payroll information, or supporting records.
What Are the Different Types of IRS Audits?
IRS audits can take different forms depending on the circumstances.
Correspondence Audit
A correspondence audit is generally handled through written communication.
The IRS may ask you to provide documentation supporting a particular item on your return. This could include records supporting a deduction, credit, income amount, or other tax position.
These audits may be relatively straightforward when the requested documentation is readily available.
Office Audit
An office audit involves meeting with an IRS representative, generally at an IRS office.
The taxpayer may be asked to bring specific records and documents.
The IRS notice should explain what information is required and where the meeting will take place.
Field Audit
A field audit is generally more comprehensive and may take place at a taxpayer’s home, business, or another appropriate location.
Field audits are more common when the tax issues are complex or involve businesses and substantial financial records.
Because of the potential complexity, taxpayers facing a significant field audit may want to consider obtaining professional representation.
What Documents Should You Gather?
The documents you need will depend on what the IRS is examining.
Potentially relevant records include:
- W-2 forms
- 1099 forms
- Bank statements
- Brokerage statements
- Business income records
- Business expense receipts
- Mileage records
- Mortgage documents
- Charitable donation records
- Medical expense records, where applicable
- Educational expense documentation
- Real estate records
- Prior tax returns
- Invoices and contracts
- Accounting records
Do not send random documents simply because you have them.
Instead, review the audit notice carefully and provide documentation relevant to the specific items the IRS has asked about.
Keep copies of everything you provide.
What Happens During an Audit?
The exact process depends on the type of audit and the issues being examined.
The IRS may ask questions about specific entries on your tax return and request documentation supporting those entries.
You should answer questions honestly and avoid guessing.
If you do not know the answer to a question, it is generally better to say that you need to review your records rather than provide inaccurate information.
If the audit involves a business, the IRS may review financial records, expenses, bank statements, accounting systems, and other documentation.
At the end of the examination, the IRS may determine that the original return was correct, propose changes, or make other adjustments.
What If the IRS Finds a Problem?
An audit does not necessarily end with the taxpayer owing money.
There are several possible outcomes.
The IRS may conclude that no changes are necessary. Alternatively, it may propose adjustments that increase the amount of tax owed.
In some circumstances, an audit could actually result in a taxpayer being entitled to a refund or having a tax liability reduced.
If the IRS proposes changes that you disagree with, carefully review the explanation.
You generally have rights to challenge certain IRS decisions, and the appropriate process depends on the type of determination involved.
Can You Disagree With an IRS Audit?
Yes.
Taxpayers have important rights when dealing with the IRS.
The Taxpayer Bill of Rights includes the right to challenge the IRS’s position and be heard. This means taxpayers generally have an opportunity to explain their position and provide supporting documentation.
The Taxpayer Bill of Rights also recognizes a taxpayer’s right to appeal an IRS decision in an independent forum.
If you disagree with an audit result, do not assume that the IRS’s proposed adjustment is automatically final.
Review the notice carefully and determine what options are available to you.
Because appeal deadlines can be important, it is wise to act promptly.
Should You Hire a Tax Attorney for an IRS Audit?
Not every audit requires a lawyer.
If the IRS is requesting a simple document and you have clear records supporting your tax return, you may be able to handle the matter yourself.
However, professional assistance may be worth considering when the audit involves significant money or complicated legal issues.
You may want to speak with a tax attorney, CPA, or enrolled agent if:
- The audit involves a large amount of money
- You operate a business
- Multiple tax years are being examined
- The IRS is questioning substantial deductions
- You have incomplete records
- You are concerned about possible penalties
- The IRS is investigating potential fraud
- You have previously received IRS collection notices
- You disagree with the proposed assessment
- The matter involves international tax issues
A tax attorney may be especially important when you are concerned that the matter could involve civil fraud or criminal tax exposure.
What Is the Difference Between a Tax Attorney, CPA, and Enrolled Agent?
Different tax professionals have different areas of expertise.
A tax attorney is a lawyer who can provide legal advice concerning tax matters and represent clients in appropriate legal and tax proceedings.
A CPA, or certified public accountant, is a licensed accounting professional who may provide tax preparation, accounting, and tax planning services.
An enrolled agent is a federally authorized tax practitioner who can represent taxpayers before the IRS.
The best choice depends on the nature of your situation.
For a routine tax-document issue, an experienced tax preparer or accountant may be sufficient. For complicated legal disputes or potential allegations of wrongdoing, a tax attorney may be more appropriate.
What If You Cannot Afford Professional Help?
Not every taxpayer can afford private legal representation.
The IRS provides information about taxpayer assistance programs, including Low Income Taxpayer Clinics for qualifying individuals.
Some taxpayers may also be able to obtain assistance from nonprofit organizations or other taxpayer advocacy resources.
If you are considering professional assistance, ask about fees before signing an agreement.
A reputable professional should explain what services are included, how fees are calculated, and what additional expenses you could potentially face.
Keep Your Records Organized
One of the best ways to protect yourself during an audit is to maintain organized tax records.
Do not throw away receipts, tax documents, or supporting records immediately after filing a return.
The appropriate record-retention period can vary depending on the type of document and circumstances. Taxpayers should review current IRS guidance regarding how long they should keep specific records.
If you are self-employed or operate a business, maintaining accurate accounting records throughout the year can make an audit significantly easier to manage.
Never Alter or Create Documents
If you discover that you are missing documentation during an audit, do not create or alter records to make your tax return appear more accurate.
Providing false documents or intentionally misleading the IRS can create much more serious problems than an ordinary documentation issue.
Instead, explain the situation honestly and determine what legitimate alternative records may be available.
Bank statements, invoices, canceled checks, contracts, electronic records, and other documentation may sometimes help establish what actually occurred.
What If You Made a Mistake on Your Tax Return?
Taxpayers sometimes discover during an audit that they made an honest mistake.
The appropriate response depends on the circumstances.
Do not panic, and do not attempt to hide the mistake.
Explain the situation accurately and provide whatever supporting documentation is available.
If the error involves a substantial amount of money or raises questions about potential penalties, consider consulting a qualified tax professional before responding.
How to Prepare for an IRS Audit
If you receive an audit notice, follow a structured approach:
First, read the notice completely. Identify the tax year, issues being examined, requested documents, and response deadline.
Second, gather your records. Collect documents that directly support the items under examination.
Third, compare your records with your tax return. Make sure you understand what was originally reported.
Fourth, prepare your response. Answer the questions asked by the IRS and provide relevant documentation.
Fifth, keep copies. Maintain a complete record of every document and communication.
Finally, consider professional assistance. If the situation is complicated or potentially expensive, getting advice early may be more useful than waiting until the dispute becomes more serious.
Final Thoughts
An IRS tax audit can be stressful, but receiving an audit notice does not automatically mean that you have committed tax fraud or that you will owe additional money.
The most important steps are to take the notice seriously, understand what the IRS is asking for, organize your records, meet applicable deadlines, and respond honestly.
You also have rights as a taxpayer. The IRS Taxpayer Bill of Rights provides protections concerning information, service, challenging IRS positions, appeals, privacy, confidentiality, and representation.
If the audit involves a substantial tax liability, a business, multiple tax years, potential penalties, or allegations of intentional wrongdoing, consider speaking with a qualified tax attorney or other authorized tax professional.
Tax laws and IRS procedures can change, and individual circumstances can significantly affect your rights and obligations. This article provides general educational information and is not a substitute for individualized legal or tax advice.