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While it's unlikely you'll face an audit—unless your income is exceptionally high, your chances are under 1%—it's still wise to be prepared. In the rare event it happens, knowing your rights and organizing your documents can help you navigate the process with confidence.
Understanding the Three Key Types of IRS Audits
If you're pulling in millions annually, your audit risk is roughly 1 in 6, based on an IRS data analysis. For those reporting no income, your chances are about 1 in 20. For the majority of taxpayers, however, fewer than 1 in 100 returns are selected.
You typically need to raise significant red flags to attract an IRS audit. Perhaps your home office deduction was unusually large, or maybe your business income dropped drastically, making the IRS suspicious of hidden cash. That said, most of us won’t have to stress over an audit. But if you’re among the unlucky few, it can be a stressful experience.
The specifics of your audit, including its duration and the paperwork required, depend on the type of audit you're facing. There are three primary kinds.
Correspondence Audits: These are the simplest form of audit, typically triggered by a minor mistake on your tax return, such as a typo.
Office Audits: A more involved and intimidating process, an office audit requires you to visit an IRS office with the necessary documentation. According to law site Lexology, an office audit may occur if you claim significant deductions, such as medical expenses.
Field Audits: A field audit is essentially an office audit that comes to you. The IRS will visit your home or business to review your records. While you can request to transfer a field audit to an IRS office, there’s no guarantee that request will be approved.
Investopedia notes that there are also more extreme audits, where the IRS examines every single detail of your tax return as part of the National Research Program. However, these are incredibly rare.
If you’re selected for an audit, the IRS will send you a letter or potentially even call. They will never reach out by email. As a rule of thumb, if you receive an email claiming to be from the IRS, it’s likely a scam. If the IRS does call, they’ll follow up with a letter (here’s an example of an audit letter). This letter will detail the type of audit and the specific records they need from you.
Schedule Your Audit (or Delay It If Needed)
For a correspondence audit, the IRS will set a deadline for submitting your updated records. But for a field or office audit, you’ll need to arrange a meeting, typically within a few weeks. This should provide enough time to get your documents in order. If that’s not enough time, you can ask for a delay, according to the IRS:
If you're missing any requested documents, contact your auditor at the number provided in the notification letter to discuss what you have available. In some cases, the audit can start with the existing records instead of rescheduling. The sooner the audit begins, the sooner it can be finished. If the initial meeting is set more than 45 days from the first contact, managerial approval is required.
To delay your appointment, send the IRS a written request for a postponement. Here’s a sample you can use as a guide.
Prepare Your Documents
You can delay your audit, but you’ll need to face it eventually. Once your audit is scheduled, it's time to gather your paperwork. Your audit letter will include a list of the forms you need, which may include the following:
W-2s
1099s
Bank statements
Proof of income
Investment statements
Receipts, bills, or other proof of expenses
The IRS prefers paper copies of these documents, but they may accept electronic versions in some cases. It's a good idea to check with your auditor to confirm what will be accepted.
In some cases, showing proof of payment won’t be enough. For example, if the IRS is questioning your business deductions, you’ll need to demonstrate that your expenses were legitimate, as TaxAudit.com explains. Therefore, you should keep detailed records of each expense, including:
When substantiating travel, meal, and entertainment deductions, you’re required to maintain an account book, diary, log, trip sheet, or similar records, along with supporting evidence like receipts and cancelled checks. These should document the amount, time, place, people involved, and the business purpose of your expenses.
In theory, you should keep every document, but since that’s not always possible, you’re allowed to reconstruct missing records, according to TaxDebtHelp.com. If the auditor finds your reconstructed documents reasonable, they may allow you to keep your deductions. However, be prepared for the possibility of rejection. The auditor may not accept your reconstructed documents as sufficient proof—it’s up to their discretion.
Don’t Be Hostile Toward the Auditor
A lot of the audit process depends on the judgment of your auditor, so it's important to stay calm and cooperative. Remember: the more flexible and willing you are to work with them, the smoother the process will be. After all, your auditor is simply doing their job, so there’s no reason to be rude.
While you want to be honest and helpful, you also want to keep your responses concise. Here are some tips TaxDebtHelp recommends:
Keep your answers short
: Audits can be nerve-wracking, and many people end up talking more than necessary when they’re anxious. Auditors are trained to listen carefully, and over-explaining can lead them to dig into other years' taxes that weren’t part of the original audit. Stick to simple answers like: Yes, No, I don’t know, I’ll need to look that up, What specific documents do you need?, and What’s the reason for that?. Talking too much is a common mistake and can cost you during the audit.
Never lie or mislead the IRS:
They may ask questions they already know the answers to, just to see how trustworthy you are. It's crucial to be completely honest, but avoid oversharing or saying more than necessary.
Similarly, don’t volunteer information about tax years that aren’t part of the audit. The auditor can still make adjustments to those years, even if they weren’t initially included in the audit. Stick to providing the required documents and keep things straightforward.
Think About Hiring a Tax Expert
If you’re facing a complex field audit, it’s probably time to bring in a qualified tax professional.
CBS News outlines your available options:
You have the option to handle your audit alone, bring a tax professional with you, or have one represent you. If you choose to attend the audit yourself or bring someone along, there’s a greater chance that the auditor may ask questions you'd prefer not to answer immediately.
If you want a representative to handle your audit, you will need to submit IRS Form 2848. After signing this form, the IRS will communicate directly with your representative, not with you.
Fox Business notes a couple of key advantages of hiring a professional. For one, they are experienced with the audit process, which can help ensure a smoother experience. Additionally, they are well-versed in tax law, which can be useful if the auditor makes any errors.
Know Your Rights During an Audit
While you might feel like you have no control during an audit, you still have rights as a taxpayer, as outlined in the Taxpayer Bill of Rights (PDF). Here are some important rights that may assist you throughout the audit process:
The Right to Be Informed
: Taxpayers are entitled to be fully informed about what steps they need to take to meet tax obligations. They have the right to clear explanations of the tax laws, IRS processes, and any related forms, notices, instructions, and publications. Furthermore, they should be kept updated on IRS decisions regarding their tax accounts and provided with understandable summaries of those decisions.
The Right to Appeal an IRS Decision in an Independent Forum:
Taxpayers are granted the right to challenge most IRS decisions, including penalties, in an impartial administrative setting. They are also entitled to a written explanation of the outcome from the Office of Appeals. In most cases, taxpayers can take their dispute to court if necessary.
The Right to Retain Representation:
Taxpayers are allowed to appoint a representative of their choice to handle IRS matters on their behalf. If they cannot afford such representation, they have the right to seek help from a
Low Income Taxpayer Clinic
for assistance.
If you undergo a correspondence audit, sometimes the IRS will simply inform you of any adjustments made to your return. As noted by USLegal.com, you can appeal this adjustment by sending a written appeal letter within 60 days of the notice.
Review the Results of the Audit
After the audit concludes, you will receive the audit results, often referred to as IRS Form 4549 (PDF). This document will outline any changes made, including the amount you owe, or if you're fortunate, a refund. If no adjustments are necessary, the report will indicate that as well.
If adjustments are made, you have two choices. You can accept the findings by signing the report or form. If you owe taxes, the IRS provides various payment methods. For more details on this process, refer to Publication 594 (PDF), which thoroughly explains IRS collections.
If you disagree with the findings, you have 30 days to take one of the following actions, as per Tax Debt Help:
Submit any additional documents you wish the IRS to consider.
Request a meeting with the examiner to discuss the findings (you can also provide further information for consideration during the meeting).
Speak with the group manager or senior manager regarding your case.
Request an appeal: If you disagree with the proposed changes and could not resolve the issue with the examiner, pursuing an appeal might be a suitable option.
If you don't respond within 30 days, the IRS will send a notice. Failing to reply within another 30 days will result in the findings being considered final. If you wish to appeal, the IRS provides the process here. Keep in mind that during the appeal, you will be required to pay interest on any payments that were finalized.
While an audit can be overwhelming, it's not a situation most of us will encounter. Nonetheless, it's wise to be prepared just in case.
Illustration by: Sam Woolley
