IRS Audit Guide: Understanding the Process and How to Respond

An IRS audit can be an intimidating experience, but understanding the process and knowing how to respond can make it more manageable. This guide explains why audits happen, the different types of audits, how to prepare, and the steps you can take to resolve an audit efficiently.

1. Why Does the IRS Conduct Audits?

The IRS selects tax returns for audits based on various factors, including:

• Random Selection: Some audits are purely statistical and part of IRS compliance programs.

• Discrepancies or Red Flags: Unusual deductions, unreported income, or excessive business expenses.

• Related Audits: Your return may be audited if it is linked to another taxpayer under audit, such as a business partner.

• Document Matching Issues: Differences between reported income and IRS records from W-2s, 1099s, or other tax forms.

2. Types of IRS Audits

2.1 Correspondence Audit

• Conducted via mail.

• Usually for minor issues like math errors, missing forms, or documentation requests.

• Requires you to send supporting documents to clarify discrepancies.

2.2 Office Audit

• Conducted at a local IRS office.

• You must appear in person with requested documentation.

• Typically involves reviewing deductions, credits, and business expenses.

2.3 Field Audit

• An IRS agent visits your home, business, or accountant’s office.

• Often focused on complex tax issues, business records, and high-income returns.

• Requires thorough preparation and professional representation.

2.4 Taxpayer Compliance Measurement Program (TCMP) Audit

• A highly detailed audit used for research purposes.

• Requires substantiation of every line item on your tax return.

3. How to Prepare for an IRS Audit

3.1 Gather Your Documents

• Tax return(s) under audit.

• W-2s, 1099s, and other income records.

• Receipts and invoices for deductions and expenses.

• Bank statements and financial records.

• Business records (if applicable).

3.2 Understand the Scope of the Audit

• Review the IRS audit notice (Letter 2205 or CP2000).

• Determine which tax year(s) and issues are under review.

• Consult a tax professional if needed.

3.3 Respond Promptly and Accurately

• Meet all deadlines stated in the IRS letter.

• Provide only the requested documents—no extra information.

• Ensure all responses are clear and well-organized.

4. Your Rights During an IRS Audit

• Right to Representation: You can hire a tax professional or attorney.

• Right to Privacy and Confidentiality: The IRS must follow procedures that protect your information.

• Right to Appeal: If you disagree with the audit findings, you have options to challenge them.

• Right to Know Why the IRS is Asking for Information: You are entitled to clear explanations.

5. What Happens After the Audit?

5.1 No Change to Your Return

• The IRS accepts your documentation, and no adjustments are made.

5.2 Agreed Changes

• If errors are found, the IRS proposes changes, and you agree to them.

• You may owe additional taxes, interest, or penalties.

5.3 Disputed Changes

• If you disagree with the IRS findings, you can:

  • Request a meeting with an IRS manager.

  • File an appeal with the IRS Office of Appeals.

  • Take your case to the U.S. Tax Court.

6. Avoiding Future Audits

• Keep accurate and well-organized records.

• Report all income, including gig work and side jobs.

• Avoid excessive deductions that are inconsistent with IRS norms.

• File returns on time and review them for accuracy.

Conclusion

Facing an IRS audit can be stressful, but preparation and understanding your rights can help you navigate the process effectively. Whether responding to a correspondence audit or preparing for a field audit, having the right documents and professional guidance can make a significant difference. Stay informed and proactive to reduce audit risks and ensure compliance with tax regulations. For expert insights and guidance, visit the American Institute for Tax Policy and Research (AITPR).