IRS audits: What does it mean to be audited, and what are common IRS audit triggers?  

Most people consider the phrase “being audited” as one of the worst in the English language. But in many cases, the fear of an audit from the Internal Revenue Service (IRS) is worse than the audit itself. Plus, the average person stands a relatively small chance of being audited. The likelihood increases when tax fraud, tax evasion, and other issues come into the picture.

What does “audit” mean?

When the IRS audits your return, this means they verify if you have correctly reported tax information and paid the right amount of tax. In many cases, an audit can simply be correspondence between you and the IRS.

You have nothing to worry about if you reported your information correctly and you kept required tax records. But if you find yourself in the position of being audited, it can help to understand the process and the terminology.  

The IRS audit process

There are two ways you could be audited: by mail or in person. We’ll walk through each case below so you can easily follow along.

The IRS audit letter: The mail audit process

The most common individual tax return audit is a mail audit, also called a correspondence audit. The IRS will mail an official notice requesting specific answers and documents to support a triggering detail within your filed return. Examples include substantiating income, deductions, or tax credits.

When your response is requested:

• Respond to the IRS with all evidence by the specified deadline.
• Submit all requested supporting documentation.
• Remain actively involved with the process, including any filed appeals or disputes.

When exchanging documentation with the IRS, be sure to include an explanation of how each item supports the information on your filed return. When you can’t find proof, providing a thorough explanation via oral testimony could be the next step.

If you disagree with the IRS decision on your return, including any proposed penalties, you may be able to file an appeal with the IRS.

In person: The face-to-face audit process

In-person audits generally fall into two categories:

1. Office Audit (Desk Audit): Audits within an IRS office are called the office audit or desk audit. Office auditors, called tax examiners, focus on specific items on the tax return in question.
2. Field Audit: When the IRS conducts an audit at your home, business location, or representative’s office by an IRS revenue agent, it’s called a field audit.

Revenue agents review all types of returns, especially taxpayers with a high net worth or complicated returns with mistakes.

Expect four phases during an office or field audit:

1.     Audit notification and preparation: The IRS notifies you (or both you and your authorized tax preparer) about the audit, almost always by mail. Usually, the audit is for a return you filed within the past two to three years. The IRS will send a request for information via IRS Form 4564, called an Information Document Request (IDR). The IDR will show you what the IRS wants to audit.

Don’t assume the audit ends there. Office and field audits can last more than a year and often expand to address other issues.

2.     Initial interview: Office audits take a few hours to complete. For field audits, this process can take up to a full day, depending on the complexity of the tax return. During this time, you will give the IRS auditor the big picture of your circumstances, the tax year under examination, and the items requested by the auditor. A tax preparer can also represent you during this process.

3.     Issue development: Inevitably, the IRS will focus on a few items—and will ask questions about your return and finances. In this stage, you or your tax preparer must advocate for your case and provide explanations to the auditor. If the auditor proposes an adjustment to the return and/or penalties, you will need to decide to agree or start preparing your appeal.

4.     Finalizing the audit and appealing the decision: If the appeals process is your next step, an impartial person in the IRS Office of Appeals will consider your petition at an appeals hearing. This hearing is held months after the audit has ended and will likely take place by phone. You can request a face-to-face meeting with the appeals officer if you prefer. If you disagree with the decision, you could eventually take your case to the U.S. Tax Court.

The audit process can be time-consuming, but it doesn’t last forever. Once you’ve provided the necessary documentation, cooperated with the auditor, and addressed any issues, the audit will eventually come to a resolution, and you can put it behind you.

How to address an IRS audit

If you’re audited, here’s what to keep in mind:

1. Understand the scope of the tax audit.

• Mail audits are limited to a few items in the audit letter you received from the IRS.
• Office and field audits require more work. You’ll need to gather the information/documents that the IRS requests, then prepare to answer in-depth questions about your finances.
• When it comes to office and field audits, unless you are proficient at IRS procedures, it’s highly recommended that you get a licensed tax professional (enrolled agent, CPA, or attorney) to represent you and advocate your tax return positions before the IRS.

2. Prepare your responses to IRS questions.

• For a mail audit, prepare a complete response to the items the IRS is questioning in the letter/document you received.
• For office and field audits, prepare for the meeting with the IRS officer/agent. Gather all information the IRS has requested and prepare to present it to them. Prepare for possible questions, especially concerning unexplained bank deposits or additional income. The IRS agent could also ask about your job, family, and any outside businesses. Be prepared to give an account of your entire year’s financial activities.
• If you can’t prove any items on your return, you may have to reconstruct it from third parties or other financial records. If a third party can attest to an undocumented item, you can use techniques such as an affidavit.

3. Respond to IRS requests for information/documents on time, and advocate for your tax return.

• If the IRS thinks they need to adjust your return, the IRS will ask more questions. You’ll get an Information Document Request (IDR), which you’ll need to fully respond to by the deadline.
• The IRS may disagree with you. They may claim you took a deduction that wasn’t allowed or that you should have reported more income on your return. If you disagree, present your interpretation of the facts and tax law to the IRS.
• Ultimately, the IRS will close the tax audit, either proposing no changes or proposing adjustments to your return. You’ll get a report of the IRS findings and a letter that allows you 30 days to appeal if you disagree (called the 30-day letter).

4. If you disagree with the results, appeal to the appropriate venue.

• Within 30 days, you can request an appeal with the IRS Office of Appeals. After 30 days, the IRS will send you a letter, called a Statutory Notice of Deficiency. This letter closes the tax audit and allows you to petition the U.S. Tax Court.
• In mail audits, remember that the letter proposing adjustments also serves as a 30-day letter. Taxpayers commonly overlook this letter and lose their ability to appeal the audit findings within the IRS.

Alternative methods to submit or respond to documentation

There may be special circumstances where the IRS offers digital alternatives for submitting documentation or working with the IRS examiner through Secure Messaging and the Document Upload Tool (DUT).

However, you need an invite to participate. Review your notice carefully to see if this option is available in your case, and for information on how to use it.

Getting the best results from your audit

Here are a few things you should do to get the best audit results:

• Consider hiring a tax professional, especially if you are not fluent in tax matters. An audit can get complex quick, and you may feel intimidated trying to handle it yourself. Many tax professionals trained in IRS audits will provide the response needed to clearly communicate your position. And if there’s an adjustment, they can help address your options. Learn about H&R Block Tax Audit & Notice Services.
• Assert your appeal rights when needed. The auditor’s decision is not final when you file an amended tax return. The first appeal is made to the auditor’s manager. The second appeal is made to the IRS Office of Appeals. During the appeals process, it’s essential to respond to all deadlines; failing to do so will result in the loss of important appeal rights.
• Meet audit deadlines: If you want the best results, reply well before the deadline with an organized and thorough response that explains the items in question. Missed deadlines and incomplete responses lead to more notices and a higher likelihood that the IRS will close your audit and assess additional taxes.

Requesting additional time to respond to an IRS letter or audit notice is a great option if you can’t provide all documentation before the IRS deadline. This choice offers a protective measure to offset additional taxes and penalties. If you’ve already missed the deadline and you were charged additional taxes, you can request audit reconsideration from the IRS.

Find expert help from a tax professional to weigh your options as this process can become complicated.

Common misconceptions about IRS audits

IRS audit misconceptions can leave you feeling anxious. Let’s debunk common myths to put your mind at ease:

Myth 1: The IRS is out to get taxpayers.

The IRS selects returns for audit in different ways. Some are randomly selected, and some are selected because of a related return or incomplete/inaccurate information.

Randomized audits

Some audits result from a computerized review process, instead of being conducted by humans who may have certain biases. In some cases, IRS programs randomly select returns for audit.

Return mismatches

Other audit triggers, like mismatched information on your tax return, can prompt an audit.  If your tax return reports income information that doesn’t match information the IRS has on file (like Forms W-2 and 1099), you’ll likely receive a CP2000 notice asking you to explain the difference.

If you receive any incorrect forms from a payer (such as a financial institution), it’s best to ask them to fix the form as soon as possible. A corrected copy will be sent to the IRS, hopefully solving the mismatch issue.

Related returns

Another potential trigger is a related return audit. For example, if you receive a Schedule K-1 from a partnership, the IRS may also audit the partnership’s return. This type of audit ensures that information is reported correctly and consistently across all related returns.

Myth 2: I better pay up immediately.

An IRS letter is not necessarily a bill, so wait to break out your checkbook if you can show that your tax return was correct.

An audit becomes a tax bill only if you:

• Agree with the proposed changes the IRS is making during the audit
• Fail to respond to the notice by the IRS deadline
• Don’t provide the IRS with records supporting your original return

To make sure your IRS letter doesn’t result in a tax bill, submit a complete and timely response to the IRS showing you were entitled to claim all the income, deductions, and credits reported. When sending copies of information to the IRS, use certified mail so that you have confirmation that the IRS received the information.

On the other hand, if the IRS is correct and you’ll owe a tax bill, remember that the IRS offers a range of payment options.

Myth 3: Audits are a never-ending process.

Some taxpayers fear that they’ll be subjected to more IRS audits in the future once they’re audited. In reality, most audits are specific to a particular tax year or issue. Once the audit is resolved, you can move forward without worry.

Myth 4: I can ignore an IRS tax audit notice.

If you receive an IRS notice or audit letter requesting information, now is the time to deal with this.

Understand that if you miss the IRS deadline listed in your letter, you could be giving up your rights to prove what you originally reported was correct and to dispute any additional taxes due. Read your letter carefully to see how long you have to respond, and start going through your documentation immediately.

But don’t panic. There’s a process for dealing with IRS audits, and you can get expert help handling the issue.

Get help with IRS audits

Understanding the realities of audits can help reduce anxiety and misconceptions about them. If you ever face an audit, approach it with transparency, cooperation, and, when needed, professional guidance to navigate the process effectively.

H&R Block can help you handle penalty notices and will communicate with the Internal Revenue Service for you. Get help from a trusted professional at H&R Block who can handle audits and other IRS notices.