Updated May 2025
A tax audit is when the IRS asks you to verify the details on your tax return. Normally, this involves sending supporting financial documents, but you may need additional records to support deductions, credits, or claims on your returns.
IRS audits can be scary and stressful, but you can approach the situation confidently with the right knowledge. To help you prepare, this guide explains the types of audits and what to expect during the process.
To get help, contact Wiggam Law today by calling (404) 233-9800 or completing our consultation form.
Key takeaways
- Purpose of audits – to ensure compliance with tax laws.
- Why you were selected – may be random or due to discrepancies on your return.
- Audit process– the auditor asks for supporting documents through the mail or in person.
- Review – the auditor reviews your documents and asks follow-up questions.
- Results – the auditor may make changes or accept your return as filed.
- If you disagree – you can appeal or request an audit reconsideration.
Why Does the IRS Audit Tax Returns?
The IRS audits tax returns to ensure taxpayers comply with tax regulations. Audits play an essential role in encouraging compliance.
How Does the Audit Take Place?
There are several types of audits, including the following:
- Correspondence – communicate with the auditor through the mail. They send you letters letting you know what they want, and you send in the requested information.
- Office/desk – You meet with the auditor in their office, and you bring the documents that they have requested.
- Field — The auditor comes to you. Generally, this only happens with business audits.
In many cases, the audit may occur over the phone or through a combination of mailed correspondence, phone calls, and in-person meetings. The auditor may often request information by sending you Form 4564 (Information Document Request).
Why Was I Selected for a Tax Audit?
While some audit targets are selected randomly, others are triggered by red flags or discrepancies found on tax returns. The IRS uses sophisticated computer programs to look for potential issues or inconsistencies.
For instance, you may be audited if the IRS receives a document about you from a third party, and that information doesn’t appear on your tax return. The IRS also compares the information on your return to information on similar returns. Unusually high deductions, substantial changes in income, or involvement in certain industries can also increase the likelihood of being selected for an audit.
How Will the IRS Contact Me?
If the IRS selects your return for an audit, the agency will send you a letter in the mail. This letter, most commonly known as an audit or examination letter, is a notice that outlines the scope and type of audit and lets you know how long you have to respond.
Note that the IRS will never initiate an audit through email or social media, so be cautious of fraudulent communication claiming to be from the IRS. Scammers use people’s fears about tax audits to trick them into giving away sensitive information or money.
If you are unsure about the legitimacy of a notice, you can reach out to the IRS or a tax professional to determine if your audit notice is real.
What if you don’t respond to the audit notice?
If you don’t respond, the IRS will conduct the audit without your input. If the auditor makes changes to your return, they will send you a notice and eventually a demand for payment. If you still don’t respond, the IRS can pursue involuntary collections such as wage garnishment or asset seizure.
How to Respond to the Audit Notice
Figure out which documents the IRS wants to see, and start getting them together for the auditor. Make notes of deadlines or meeting requests. If you need more time, contact the auditor to ask for an extension – typically, you can get an extra 60 days.
If you want help responding, contact a tax attorney to talk about audit representation.
What if you don’t have receipts?
You typically need receipts to back up personal and business deductions, but if you don’t have them, you may be able to recreate records or use reasonable amounts under the Cohan rule. Learn more about dealing with an audit without receipts.
How to Prepare for a Tax Audit
You must be prepared if you want the audit to go as smoothly as possible. Consider these tips:
- Schedule the audit: In most cases, you must contact the auditor to schedule the audit. Typically, the IRS spells out the timeframe for you, but then, you work with your auditor to select a certain day and time.
- Gather documents: Gather all of the documents that the auditor requested. This may include bookkeeping records, sales reports, proof of deductions, and other details.
- Consult with a tax professional: Audits can be very complex. In addition to providing documents, you may also need to explain your interpretation of the tax law.
A tax attorney with audit experience can be critical if you’re dealing with an audit. To maximize their assistance, hire them as soon as you receive the audit notice, but keep in mind that you can hire a pro at any time during the audit process.
What to Expect During the Audit Process
Here’s a breakdown of what typically happens during an IRS audit:
- Initial Interview: The audit process usually begins with an initial interview in person, by phone, or through the mail. The auditor will explain the purpose of the audit, the areas of focus, and the records required.
- Document Review: The auditor will examine the documents and records you have provided.
- Follow-Up Inquiries: They may request additional documentation or clarification on certain items. Respond promptly, but remember, you don’t have to provide extra information.
- Audit determination: The auditor will let you know if they agree with your tax return or plan to make changes.
- Your response: If you agree with the changes, you can let the process proceed and pay the tax liability. If you disagree with the changes, you can request reconsideration or appeal.
Pro-tip for audit survival – Keep copies of all the correspondence, records, and documents shared between you and the auditor. This will give you a clear record of the process and proof of any mistakes made by the auditor.
What Happens if a Tax Auditor Finds Discrepancies?
If the IRS finds discrepancies between the information on your tax return and the documents you have provided, the agency can adjust your return. Generally, this leads to a tax bill, but the agency can also make changes that reduce your tax liability.
The auditor may assess audit penalties, including:
- Late penalties – late payment or late filing penalties on the tax that wasn’t reported on the original return. Failure to file penalties are 5% per month, while failure to pay penalties are .5 to 1% per month.
- Accuracy-related penalties – 20% of the underreported tax. For instance, $2000 if you didn’t report $10,000 in tax. This may also include a penalty for erroneous credits or overstated asset values.
- Civil fraud penalties – 75% of the tax underreported due to fraud. For instance, $75,000 if you fraudulently didn’t report $100,000 in tax due.
- FBAR penalties – If the auditor discovers that you didn’t report foreign bank accounts, you may face very high FBAR penalties.
You can request abatement of some penalties.
If the IRS believes that your return was falsely filed due to criminal fraud, the agency can recommend a criminal investigation. At that point, the return goes through several layers of reviews before the agency proceeds with legal charges. Normally, you don’t have to worry about imprisonment due to an audit, but it can be a concern if criminal tax fraud is involved.
Why do people “fail” audits? Common problems and mistakes
Here are some of the common reasons people fail audits:
- Unreported Income: Failing to report all of your income, including business revenue, freelance earnings, rental income, and cash payments.
- Questionable Deductions: Excessive or unsubstantiated individual or business deductions.
- Cryptocurrency Transactions: In particular, unreported cryptocurrency gains.
- Improperly claimed credits: The IRS pays close attention to individual credits like the Earned Income Credit and business credits like the ERC or clean energy tax credits.
- Tax preparer mistakes: You’re responsible for the info on your tax return, even if it’s due to a preparer mistake. However, you may be able to bring a civil suit against your preparer for certain penalties.
Potential Outcomes of IRS Tax Audits
There are several possible conclusions for IRS tax audits:
- No Change Audit: The IRS accepts your tax return as originally filed.
- Audit Changes – Agreed: The IRS auditor proposes adjustments to your return. You agree with the changes and make arrangements to pay the tax due.
- Audit Changes – Disagreed: The auditor makes changes to your tax return, but you disagree, so you ask for an appeal or reconsideration.
If the auditor proposes changes, you have the right to appeal or negotiate with the IRS. As long as you respond by the deadline on the audit determination letter, you can appeal without paying the assessed tax. However, if you miss the deadline, your only option may be to pay the tax under protest and then request a refund.
What is Form 4549?
Form 4549 (Income Tax Examination Changes) may be sent to you to explain the changes the IRS made to your tax return during the audit. The form shows the income that was added to your return, credits that were disallowed, and any other changes made to your return, and then, it shows you how these changes affect your tax liability.
If you agree with Form 4549, sign it and make payment arrangements. Be careful—if you change your mind, you will not be able to appeal. You shouldn’t sign this form if you don’t agree.
What If You Disagree With the Audit Results?
If you disagree with the proposed changes, you can:
- File Form 12261 (Disputed Issue Verification)
- Request reconsideration
- Appeal the audit results
The right option depends on a few factors. Keep reading for more details.
Form 12261 – Disputed Audit Verification
You can dispute the items on Form 4549 using Form 12261. List the item you disagree with, explain why you disagree, and note the amount claimed on your original return and the amount allowed on the audit return. Then, attach copies of documents to back up your claims.
Make sure to file this form by the deadline noted on the 4549 form. After the auditor reviews your request, they’ll get back to you about appeal or reconsideration options.
Audit Reconsideration Process
If you disagree with the audit report, you can request a reconsideration if:
- You never received any of the audit notifications.
- You missed the audit appointment, and the IRS made changes without your input.
- You have new info related to the audit.
- You disagree with the tax due shown on the report.
To request a reconsideration, contact your auditor. They will reopen the audit. You must do this by the deadline on your exam notice.
Appealing Tax Audit Decisions
If you disagree with the outcome of an IRS audit, you have the right to appeal the decision. An appeal gives you an independent review from the Office of Appeals. An appeal is not the right choice if you want to introduce new information.
To appeal, you generally need to write a formal protest letter or file an appeals report. The appeals process is complicated and has strict deadlines. Even if you didn’t work with a tax pro during the audit, you should seek professional help during the appeals process.
Often, before you appeal, you may want to speak with the auditor’s supervisor or see if you can talk about the issue in mediation.
What If You Owe Money Due to a Tax Audit?
If you owe taxes due to an IRS audit, the best option is to pay in full, but if that’s not possible, consider:
- Installment agreement – monthly payments with a variety of terms and options.
- Offer in compromise – settle tax debt for less than owed once you prove you cannot pay with income or assets.
- Currently not collectible status – get the IRS to stop collections based on temporary hardship until your financial situation improves.
Statute of Limitations on Tax Audits
How long does the IRS have to audit your tax returns? Generally, the agency has three years after the filing deadline to audit your return. If you filed after the deadline, the statute of limitations doesn’t start until the day you filed. If you significantly reported income, the auditor may go back six years. There is no statute of limitations on fraudulent or unfiled returns.
Note that the statute of limitations for filing business tax returns is also three years. However, the clock doesn’t start ticking for payroll returns until April 15th, following the tax year related to the return. That gives the IRS extra time to select these returns for an audit. In some cases, the IRS extends the assessment deadline – for instance, this happened with many returns that claimed employee retention credits.
Get Help With a Tax Audit
IRS audits can be stressful and time-consuming, and a tax professional can be invaluable through the process. An experienced tax attorney can provide guidance, protect your rights, and help present your case effectively.
If you are facing an IRS audit, the team at Wiggam Law strongly recommends that you work with a qualified tax professional who can provide personalized advice and support tailored to your specific situation. To get help now or to just talk about your situation, contact us today by calling (404) 233-9800 or filling out our consultation form.
Remember, having professional representation can increase your chances of a favorable outcome and alleviate the stress associated with the audit process. Don’t go through this process on your own. Instead, let us lift the burden off your shoulders and deal with the IRS for you.