IRS Audits: What You Need to Know

If you’ve been selected for an audit, don’t panic – it simply means the IRS wants to take a closer look at your tax returns to make sure you reported everything completely and correctly. For instance, did you report all sources of income? Are you qualified for the deductions or credits you claimed on your return?

While the thought of an IRS audit can be nerve-racking, generally speaking, the chances of being selected for an audit is low (on average, less than 1% of individuals are audited). 

Ahead, we’ll take a closer look at the audit process – understanding how it works may help you rest easy if you ever get a letter from the IRS.

The IRS assures that “selection for an audit does not always suggest there’s a problem.” Still, you may be wondering how people get chosen for an audit.

The federal tax agency uses two general selection methods.

• Random selection/computer screening: Here the IRS uses a statistical formula to screen and select returns for audits. If something is out of the “norm,” the return would be tagged for review by an auditor. For instance, if they notice certain inconsistencies (e.g., if your reported income is significantly different from the W-2s or 1099s the IRS has on file for you), that’s when they might flag the return for an official review.  
• Related examination: The IRS could also flag you for audit if your tax return is connected with issues or transactions of other taxpayers who the agency is giving a closer look – such as related business partners or investors, whose returns were selected for an audit.

Good to know: Filing an amended return or receiving a refund does not necessarily trigger an audit.

The IRS will notify you by mail. 

Be aware: The IRS does not initiate contact with taxpayers by email, text messages, telephone, or social media channels to ask for your personal or financial information. If you ever suspect a scam, report it to the IRS immediately.

IRS audits are typically conducted in one of two ways. 

1. By mail – this is also known as a “correspondence audit.”
2. Through an in-person interview, either at an IRS office (office audit) or at your home/office (field audit).

In your audit letter, the IRS will let you know whether the audit will be done by mail or via an in-person interview. The letter will also provide relevant contact information and a list of documents the IRS wants to review.

Keep in mind that it’s your legal responsibility to maintain all records used to prepare your tax returns. The records should be kept for at least three years from when you filed your return. According to the IRS, audits typically cover returns filed within the last two years.

That being said, there are circumstances when they can look back even further – for example, if there are substantial errors in your return(s). The IRS usually doesn’t go back more than the last six years. For more information regarding the statutes of limitations, visit the IRS webpage here.

Some of the documents that the IRS might ask to review can include receipts, legal papers, employment documents (e.g., W-2s, 1099s, etc.), and bank statements. In short, anything you used to complete your tax return. This is when good tax recordkeeping can save you from a lot of stress.

If you have trouble finding the documents you need, you may request an extension. Generally, the IRS can give you an extra 30 days, but this is not a guarantee. Contact the IRS or your auditor for more information on extension requests.

Good to know: It’s important to respond to an audit by the date shown on your letter. If you fail to respond, the IRS may complete their examination by sending you an audit report with their proposed changes to your return.

It depends on a number of factors, including the complexity of the audit, how long it takes you to provide the requested documents, and whether you plan to challenge the IRS findings.

An audit can have three outcomes.

• No change: The IRS finds everything to be in order, and the audit results in no changes to your return. 
• Agreed: This is where you agree with the IRS findings and accept their proposed changes. You could owe additional taxes or receive a refund depending on their findings.
• Disagreed: This is where you disagree with the audit findings and any proposed changes to your return.

If you disagree with the IRS, you can request a meeting with an IRS manager. The IRS could offer mediation (known as Alternative Dispute Resolution) to help resolve disagreements. You may also be able to file an appeal.

As a taxpayer, you’re entitled to certain rights, including:

• A right to professional and courteous treatment by IRS employees.
• A right to privacy and confidentiality about tax matters.
• A right to know why the IRS is asking for information, how the IRS will use it, and what will happen if the requested information is not provided.
• A right to representation, by oneself or an authorized representative.
• A right to appeal disagreements, both within the IRS and before the courts.

Remember, being selected for an audit doesn’t necessarily mean you did something wrong. Think of it as a formal review or examination of your tax return, in which the IRS wants to double-check your work. If you filed your return truthfully and kept good records, you should be able to complete your audit smoothly.