How an IRS audit works

Audits aren’t common, but knowing how they work can help you prepare just in case you receive a letter from the IRS.

Derek Silva

Derek Silva

Published May 27, 2020

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KEY TAKEAWAYS

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

  • About 80% of audits for individuals happen through mail, and all you need to do is mail in the documents requested by the IRS

  • Audits are uncommon overall, but they’re more common if you claimed the EITC with income under $25,000, or if you had income over $1 million

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

An IRS audit is when the IRS reviews your finances to ensure that everything on your federal income 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.

The IRS will always inform you of an audit with a physical letter through the United States Postal Service (USPS). The letter will have instructions for you, including a number you can call if you have questions. In most cases, all you need to do is mail the IRS financial documents that prove your income, expenses, or eligibility for a tax break that you claimed. For more complex tax returns, you may need a face-to-face meeting with an IRS auditor.

Tax audits are not common. IRS data shows that only 0.6% of all individual tax returns were audited in 2018 (the most recent data, reflecting 2017 taxes) and 81% were carried out completely by mail. In IRS parlance, these are called correspondence audits.

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, like tax fraud, the IRS may audit returns for up to six years.

In this article:

What happens during an audit?

First, the IRS will send you a letter via USPS. In almost all cases, all you need to do is respond to the letter with further information about certain things on 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 and you just need to respond within 90 days by mailing the documents requested in your audit letter. You can usually request a 30-day extension if you need more time.

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.

You may also need to complete a questionnaire if your tax return included Schedule C, which is necessary if you own a business or are self-employed. Common questionnaires ask about travel expenses and business mileage.

The IRS will never initiate a tax audit through a call, text, email, or in-person visit. Learn more about common IRS scams.

What causes an audit

One thing that can trigger an audit is having “abnormal” information on your tax return. The IRS uses a computer algorithm to analyse all tax returns each year, and the algorithm may flag your return if it contains information that’s drastically different from last year, or if your return has items that aren’t common for taxpayers in similar financial situations.

As an example, if you reported $50,000 of income last year, but this year you report $250,000 without anything else changing on your tax return, the IRS may flag your return for audit.

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.

Not all audits happen because of a mistake on your tax return, though. The IRS randomly audits 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 if there isn’t anything suspicious on your return.

What doesn’t cause an audit

There are many incorrect myths about what triggers an audit. Small mathematical errors and transcription errors don’t usually cause audits. The IRS fixes many of these mistakes without even informing you. Even if you’re missing a form or schedule, the IRS may just send you a letter asking you to mail or fax the missing form instead of auditing you.

As long as you don’t make any serious errors, it doesn’t make a difference to the IRS whether you file early or late in the tax season, whether or not you claim many deductions or credits, whether you file online or with an accountant, or whether you e-file or paper file your return (though IRS data shows that paper returns are more likely to have errors). Filing an amended return also doesn’t necessarily mean you’re more likely to get audited.

Who’s most likely to get audited?

Only about 0.6% of individual tax returns are audited in a given tax year, so the average person isn’t likely to get audited. However, there are some groups of taxpayers who are audited more often than others.

IRS data shows that audits are most common for international returns — 3.4% of international returns were audited in 2018.

Individuals with income of $1 million or more were audited 3.2% of the time. On the other hand, individuals who claimed the earned income tax credit (EITC), which is for lower-income taxpayers, experienced audits more regularly than most others: 1.4% of returns that claimed the EITC and had less than $25,000 of income were audited.

Audits are also relatively common for individual returns that have business income, such as on Schedule C and report income of $100,000 or more (based on total gross receipts); 2.2% of those returns were audited in 2018.

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The 3 types of tax audits

There are three types of tax audits and which 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 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. (Read more about what to include in the next section.)

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 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 the IRS will depend on your specific situation, but there are some 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 from a tax-filing software, 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 deductible as 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 deductions.

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 to it as quickly as possible. Always follow the instructions in the letter because it will make the whole 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 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 also be eligible for some form of audit support. Audit support often costs extra, but some services include it at no additional cost. Just make sure to read the terms and conditions. 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 a tax bill, 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.

Also, 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 you need to pay it.

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About the author

Personal Finance Expert

Derek Silva

Personal Finance Expert

Derek is a tax expert at Policygenius in New York City. He has written about multiple personal finance topics in the past, and his work has been covered by Yahoo Finance, MSN, Business Insider and CNBC.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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