How an IRS audit works

Audits aren’t common, but here’s what to do and expect if you receive a letter from the Internal Revenue Service

Derek Silva

By

Derek Silva

Derek Silva

Personal Finance Expert

Derek is a personal finance editor at Policygenius in New York City, and an expert in taxes. He has been writing about estate planning, investing, and other personal finance topics since 2017. He especially loves using data to tell a story. His work has been covered by Yahoo Finance, MSN, Business Insider, and CNBC.

Updated June 30, 2021|10 min read

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An IRS audit is when the IRS reviews your finances to ensure that everything on your tax return was correct. The goal of an audit is to ensure that you have reported everything properly and paid the correct amount of tax. Audits are not common. IRS data shows that only 0.6% of all individual tax returns filed between 2010 and 2018 were audited.

The IRS will always inform you of an audit by sending you a physical letter through the United States Postal Service (USPS). The letter will have instructions and in most cases all you need to do is mail the IRS the information it requests in the letter. For example, the IRS may ask you to send a document that confirms the value of your stock losses from the past year. About 73% of IRS tax audits are carried out completely by mail. [1]

IRS audits usually happen within a few years but the IRS may go back six years or longer if it finds serious errors on your tax return.

Key Takeaways

  • The IRS can usually go back three years for an audit, but they may go back as many as six years if they find substantial errors on your tax return

  • About three-quarters of audits for individuals happen completely through mail, and all you need to do is send the documents requested by the IRS

  • Audits are uncommon, but they’re more common for a taxpayer who claims the EITC with income under $25,000 and for someone who has income over $5 million

  • You can almost always appeal an audit decision if you disagree with it

How far back can the IRS audit you?

Most IRS audits happen within two years of filing your return, but the IRS can go back three years for an audit, based on the due date or filing date of your return (whichever was later). For substantial errors on your return, like intentional tax fraud, the IRS may investigate returns for up to six years. [2]

What happens when you get audited?

First, the IRS will send you a letter via USPS. In most cases, all you need to do is respond to the audit letter within 90 days by mailing further documents or information about your tax return. For example, the IRS may ask you to confirm your income or expenses to ensure you qualified for one of the tax deductions you claimed. Most audits happen completely by mail. You can usually request a 30-day extension if you need more time.

You may need to meet with an IRS representative

In some cases, you need to meet with an IRS representative to discuss your finances. The interview portion of an audit happens in person at either an IRS field office or your place of business. In-person interviews are more common for businesses and organizations, but also happen with individuals who have complicated tax returns.

IRS workers won’t just show up at your house unexpectedly to audit you. The IRS will always send a letter first (or even multiple letters) and it’s rare for an IRS agent to show up without setting up a meeting time with you beforehand. If someone is at your house claiming to be an IRS agent, be careful that it isn’t a scam (there’s more on audits scams later on).

You may need to complete a questionnaire

You may also need to complete a questionnaire if your tax return includes Form 1040 Schedule C, which is necessary if you own a business or pay self-employment taxes. There are a few different questionnaires and the most common ones ask about travel expenses and business mileage.

What causes an audit

The IRS uses a computer algorithm to analyze all tax returns each year, and the algorithm may flag your return if it contains information that’s drastically different from last year — like if your income increased by $100,000 from last year without anything else changing on your tax return — or if your return has items that aren’t common for taxpayers in similar financial situations.

If you have done business with someone who was audited — like a business partner or someone who invested in your company — the IRS may also audit you or your business.

The IRS does also randomly audit some taxpayers each year as a way to ensure that its own processes for examining returns have been working properly. Random audits are usually correspondence audits and can be very simple as long as nothing suspicious turns up on your return.

What doesn’t cause an audit

There are many misconceptions about what causes and audit, and the following don’t necessarily increase your likelihood of being audited:

  • Small mathematical errors and transcription errors — the IRS fixes many of these mistakes without even informing you

  • Forgetting to attach a form or schedule to your return — the IRS may send you a letter asking you to mail or fax the missing form instead of auditing you

  • Filing early or late in the tax season

  • Claiming many deductions and credits or claiming none

  • Receiving a tax refund or owing a tax bill

  • Working with a human preparer or e-filing your tax return

  • Filing a paper return — though IRS data shows paper returns more commonly have errors than e-filed returns

  • Requesting a tax filing extension

  • Filing an amended return

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Who’s most likely to get audited?

The average person is not likely to get audited. Only 0.6% of all individual tax returns filed between 2010 and 2018 were audited, with just 0.1% of returns with annual income between $50,000 and $500,000 getting audited.

The following groups were most likely to get audited according to the latest IRS data:

  • Tax returns with income of $1 million or more

  • Tax returns that reported no positive income

  • Returns that claim the earned income tax credit (EITC)

  • Estate tax returns

For 2018 taxes, the most recent data from the IRS, the audit rate was 5.3% for returns that reported income of $10 million or more, 1% for returns with income between $5 million and $10 million, and 0.6% for returns with income between $1 million and $5 million.

On the side of the income spectrum, 2.0% returns that didn’t report positive income were audited and 0.9% of returns claiming the earned income tax credit were audited. Returns with income between $1 and $25,000 also had a relatively high audit rate: 0.4%.

The 3 types of tax audits

There are three types of tax audits, and which one you go through determines what the exact process looks like:

  • Correspondence audits (mail audits)

  • Field audits

  • Office audits

Mail audits

A mail audit, officially called a correspondence audit, requires you to send the IRS documents or financial records through the mail. This is the most common type of audit for individuals.

The initial audit notice you get from the IRS will tell you what to send and where to send it. Consider using certified mail (USPS) or a similar service with a tracking number so you can confirm that your documents are delivered. If you’re submitting multiple documents, try to organize them by year and the type of income or expense they demonstrate. You may also need to include a summary or description of the documents you’re sending.

Office audits

During an office audit, also called a desk audit, the IRS will require you to visit an IRS office for a face-to-face interview with an auditor. Visiting an office allows you to show your documents and explain what’s in them. Office audits are more common for people with complicated income tax returns or too many documents to easily mail. Your initial audit letter will have contact information for the IRS and instructions on how to set up a visit.

Field audits

Field audits happen when an IRS representative visits you to look over your financial documents. A field audit may happen at your home, your place of business, or in your accountant's office. The first audit letter you receive from the IRS will provide contact information so you can set up a meeting location and time. Field audits do not happen randomly. The IRS will always start by sending a letter and trying to set up a meeting time with you.

Field audits are most common for businesses or organizations that have too many financial documents to easily carry to an IRS office. However, they do happen for taxpayers with complicated tax situations. It’s also possible that after mailing in documents for a correspondence audit, the IRS will determine that an in-person meeting is necessary to more easily look at your taxes.

Documents you may need for an audit

The documents you need to show during an IRS tax audit will depend on your specific situation, but there are common records the IRS may request. Always make sure to send copies and keep the original documents for your own records. It's also best to include a written summary that explains what's on each document you send and how it relates to your audit.

If you only have electronic copies, it’s possible the IRS will accept them. Contact the IRS through the phone number listed in your letter to see which digital forms they’ll accept.

Receipts: You should ideally include itemized receipts with a clearly visible date.

Bills: Make sure they’re dated and show the recipient of the payment. If you have a canceled check for the bill, include that too.

Legal papers: Papers you may need include divorce settlements, custody agreements, civil or criminal defense papers, loan agreements, or forms showing tax preparation advice or services you received. Make sure to include a written summary of what the paper shows in relation to your audit.

Logs or diaries: Mileage logs are common for proving that a mileage reimbursement request was accurate and that the mileage was actually for business purposes.

Records of your job search: Job-hunting expenses were eligible for itemized deductions before 2018, but you may also need to prove job-hunting expenses if you claimed the child and dependent care credit. This may include mileage or other expenses incurred as you searched for a job.

Tickets: Travel tickets or lottery tickets may be necessary to prove spending and losses.

Medical and dental records: Records could include receipts, medical account statements, physician statements, or documents explaining your health care policy’s benefits. Make sure to keep records for at least a few years, especially if you itemize and claim the medical expense deduction.

Proof of loss or theft: This may include insurance claims, police reports, photographs, or records from an appraiser (like stating the fair market value of your home).

Income documents: You may have W-2 forms, 1099 forms, Schedule K-1, or other payment documents that show your income (or loss) for a given year.

How to handle an audit

When you receive an IRS audit letter, it’s best to respond as quickly as possible. Always follow the instructions in the letter because it will make the whole audit process smoother and perhaps quicker.

If you need to mail something to the IRS, create copies of the necessary documents and send them to the address listed in the letter. If you don’t have something and need to request a copy from someone, like if you lost a tax form and new another copy, reach out to the document’s original sender as soon as you can.

You can usually request one 30-day extension from the IRS by calling the number listed in your letter. The IRS will not grant an extension if you received a “Notice of Deficiency” by certified mail.

Getting help for an audit

If you have a face-to-face interview, or if you have to go to a tax court, you may want to talk with a tax professional for help. It’s possible that your regular tax preparer can help with the process, but someone can only officially represent you during an audit if they’re a certified public accountant (CPA), enrolled agent (EA), or tax attorney.

If you e-filed through an online tax-filing service, you may be eligible for some form of audit support. Audit support often costs extra, but some services or plans include it at no additional cost. Make sure to read the terms and conditions since some products only include general advice on how audits work, while others include everything up to representation in a trial.

What happens after an audit

Your audit can end in one of three ways:

  • No change: Your return was fine after all and your audit simply ends.

  • Agreed: The IRS proposes changes to your return, like saying you actually owed additional tax, and you agree to the changes. If you owe money, you can make payments or set up a payment plan.

  • Disagreed: The IRS proposes changes to your return, but you disagree with the changes. Next, you can request a conference with an IRS manager to discuss your concerns, or you can appeal the decision. In just about all cases, you have the right to appeal an audit decision if you disagree with it.

You won’t go to jail for an audit unless the IRS determines that you participated in tax fraud or tax evasion. This is rarely the case. The worst case scenario for most people is that you owe a tax bill and need to pay it.

IRS tax audit scams to avoid

If you are informed of an audit in any way other than through a letter in the mail, it likely isn’t a legitimate audit. The IRS will never initiate a tax audit through a call, text, email, or in-person visit.

An IRS agent will never just show up at your home or office unless the IRS has already sent you an audit letter and tried to set up a meeting time with you. An IRS auditor also won’t threaten you with jail or heavy fines unless you pay them immediately.

If an IRS representative does ever visit you, they should always give two specific forms of identification: a pocket commission and an HSPD-12 card (sometimes called a PIV card). You have a right to see both types of ID, and any IRS employee should also provide an official IRS phone number you can call to verify their credentials.

Learn more about common IRS scams and how to protect yourself.