What to Expect During an IRS Audit
An IRS audit does not automatically mean you did something wrong. It means the IRS is reviewing information from your return to verify whether income, deductions, credits, or other items were reported correctly.
The IRS defines an audit as a review or examination of an organization’s or individual’s accounts and financial information to ensure information is reported correctly under tax law and to verify the reported tax amount is correct. Source: https://www.irs.gov/businesses/small-businesses-self-employed/irs-audits
How will the IRS contact you?
The IRS states that it will notify you of an audit by mail and will not start an audit by telephone. Source: https://www.irs.gov/businesses/small-businesses-self-employed/irs-audits
That first letter matters. It should explain what is being reviewed, what records are needed, where to send documents, and how to contact the IRS.
Types of IRS audits
The IRS conducts audits by mail or through an in-person interview. Source: https://www.irs.gov/businesses/small-businesses-self-employed/irs-audits
Common audit types include:
- Mail audit: The IRS requests documents by mail for specific items.
- Office audit: The taxpayer or representative meets with the IRS at an IRS office.
- Field audit: The IRS meets at the taxpayer’s home, business, or representative’s office.
The IRS states that an in-person interview may happen at an IRS office, the taxpayer’s home, the taxpayer’s place of business, or the accountant’s or representative’s office.
What records may the IRS request?
The IRS says it will provide a written request for the specific documents it wants to see. Source: https://www.irs.gov/businesses/small-businesses-self-employed/irs-audits
Depending on the issue, records may include receipts, bank statements, mileage logs, invoices, canceled checks, brokerage statements, business records, rental property records, proof of dependents, medical records, charitable records, itemized deduction records, and documents supporting credits.
Do not send a pile of unrelated documents without a plan. Organize the response around what the IRS requested.
How many years can the IRS audit?
The IRS generally includes returns filed within the last three years in an audit, and it may add additional years if it identifies a substantial error, although it usually does not go back more than the last six years. Source: https://www.irs.gov/businesses/small-businesses-self-employed/irs-audits
The IRS also states that most audits will be of returns filed within the last two years because it tries to audit returns as soon as possible after filing.
What are the possible outcomes?
The IRS lists three audit outcomes: no change, agreed, and disagreed. Source: https://www.irs.gov/businesses/small-businesses-self-employed/irs-audits
No change means the items reviewed were substantiated and the return does not change. Agreed means the IRS proposed changes and you understand and agree with them. Disagreed means the IRS proposed changes and you understand but do not agree with them.
If you disagree, the IRS says you may request a conference with an IRS manager, use mediation in some situations, or file an appeal if time remains on the statute of limitations.
Your rights during an audit
Taxpayers have rights during the audit process. The IRS lists rights including professional and courteous treatment, privacy and confidentiality, knowing why information is being requested, representation by yourself or an authorized representative, and appeal rights when you disagree. Source: https://www.irs.gov/businesses/small-businesses-self-employed/irs-audits
Representation may be helpful if the audit involves business income, rental property, self-employment expenses, missing records, prior-year issues, or proposed changes you do not understand.
Short FAQ
Q: Does an IRS audit mean I committed fraud?
A: No. An audit is a review of information, not an automatic finding of fraud.
Q: Can the IRS audit me by phone?
A: The IRS says it will not initiate an audit by telephone and will notify you by mail.
Q: How long should I keep tax records?
A: The IRS says the law requires taxpayers to keep records used to prepare a tax return for at least three years from the date the return was filed.
Q: Can I have someone represent me?
A: Yes. Authorized representatives may represent taxpayers in federal tax matters when proper authorization is in place.
If you received an IRS audit letter, ClearPath Tax Services can help you understand what is being requested, organize your records, and respond with a clear plan: https://www.clrpathtax.com/contact