What Is an IRS Tax Audit?

An IRS tax audit is a detailed review of your tax returns. It is an investigative process to ensure that you are properly reporting your income and paying the government all the money you owe. If you are faced with a tax audit, you have the option to contest and appeal.

Thomas Brock, CFA, CPA, expert contributor to Annuity.org
  • Written By
    Thomas J. Brock, CFA®, CPA

    Thomas J. Brock, CFA®, CPA

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    Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

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    Lamia Chowdhury

    Lamia Chowdhury

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    Peggy James CPA

    Peggy James, CPA

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    Peggy James is a certified public accountant with a Master of Accounting. She has spent the past several years of her career focused on working in higher education finance roles. Peggy also has accounting and finance experience working in the corporate and nonprofit sectors.

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  • Updated: March 20, 2023
  • 8 min read time
  • This page features 4 Cited Research Articles
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APA Brock, T. J. (2023, March 20). What Is an IRS Tax Audit? Annuity.org. Retrieved April 1, 2023, from https://www.annuity.org/personal-finance/taxes/irs-tax-audit/

MLA Brock, Thomas J. "What Is an IRS Tax Audit?" Annuity.org, 20 Mar 2023, https://www.annuity.org/personal-finance/taxes/irs-tax-audit/.

Chicago Brock, Thomas J. "What Is an IRS Tax Audit?" Annuity.org. Last modified March 20, 2023. https://www.annuity.org/personal-finance/taxes/irs-tax-audit/.

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Key Takeaways
  • IRS tax audits are rare, but the federal tax authority is rumored to be ramping up its examination efforts.
  • The IRS manages each tax audit in one of three ways: mail audit, office audit or field audit.
  • The IRS has a lot of power, but its audit determinations are not final. They can be contested and appealed.
  • Many licensed tax professionals provide audit representation services to help with complex audits.

An Internal Revenue Service (IRS) tax audit is a detailed review of an individual’s or organization’s accounts and financial information to ensure pertinent information has been reported in accordance with the Internal Revenue Code. Ultimately, an audit is designed to ensure a taxpayer has correctly reported his or her income and remitted an appropriate amount of income tax to the government.

An IRS audit can feel stressful, but it is not necessarily a problematic situation. If you’ve properly filed your tax return(s) and have not been actively trying to cheat the system, you shouldn’t face significant repercussions. However, if you haphazardly filed your return(s) or have been deceptive, you could be in trouble.

Regardless of your situation, knowledge is power. The more you know about what triggers an audit, how a tax audit works and the optimal way to respond to one, the better positioned you’ll be if your ticket is pulled.

Types of IRS Audits

The IRS manages each of its audits in one of two ways, by mail (mail audit) or through an in-person interview, which is either conducted at an IRS office (office audit) or at a taxpayer’s home, place of business or accountant’s office (field audit).

Regardless of the way the IRS opts to conduct an audit, the process begins via mail with an official letter that outlines the IRS’ intentions and provides instructions for the taxpayer of focus.

If the IRS elects to conduct an audit by mail, its letter will outline all information requests, usually, relating to income sources, itemized deductions and credits claimed. If you find it too cumbersome to provide the requested documentation via mail, you can request an in-person audit.

Possible Outcomes

An IRS audit can be concluded in one of the following three ways.

No-Change Audit
A no-change audit conclusion is reached when you have substantiated all items being reviewed and there are no resulting changes to your tax return(s).
Agreed Audit
An agreed audit conclusion is reached when the IRS proposes changes to your return(s) and you understand and agree with the changes. You will be asked to endorse the examination report, and you will be required to remit any unpaid tax, along with applicable interest and penalties.
Disagreed Audit
A disagreed audit conclusion is reached when the IRS proposes changes to your return(s) and you understand but disagree with them. At this stage, you can request a conference with an IRS manager. You have the option to seek mediation. Alternatively, you can file an appeal if there is enough time remaining on the statute of limitations.

IRS Audit Penalties

If the results of an audit indicate you have not paid or you have underpaid mandated federal income tax, then you will be obligated to pay the unpaid tax. You will also face a failure-to-pay penalty or an underpayment penalty, as well as an obligation to pay interest on the unpaid balance. In extreme situations, the IRS could press tax evasion charges against you. This a serious crime that can result in prison time.

What Triggers an Income Tax Audit?

IRS audits can originate from random sampling, but they are usually triggered when the IRS’ software programs detect something unusual. Essentially, the IRS evaluates filed returns using a computer algorithm that searches for deviations from the norm.

Flagged returns garner scrutiny and can lead to an audit. Some of the things that can trigger an audit flag are outlined below.

7 Things That Can Trigger an Audit Flag
  1. Mathematical errors
  2. Big, round numbers (for example, $295.25 rounded to $300.00, rather than $295.00)
  3. Income omissions, which the IRS can identify by comparing whether a return reflects the W-2 income and 1099 income reported by the paying parties
  4. Significant amount of itemized deductions
  5. Utilization of the earned income tax credit (EITC)
  6. Business-related losses (for self-employed individuals)
  7. Utilization of the home office deduction (for self-employed individuals)

What To Do If the IRS Audits Your Taxes

When it comes to an audit, the IRS is in charge. It has the power to investigate all aspects of your tax return, and its agents will dig as deeply as they deem necessary. That said, there are some things you can do to improve your position and increase the likelihood of a favorable outcome.

5 Steps To Take When the IRS Audits Your Taxes
1. Familiarize yourself with the scope of the audit.
Closely read any correspondence received from the IRS and make sure you understand what is expected of you.
2. Follow the IRS’ instructions.
This could include contacting the agency to set up an initial interview and compiling any documentation requested. For mail audits, send the IRS any information requested by the designated deadline. For in-person audits, organize your records and prepare for potential questions from the IRS, which often pertain to sources of income, unusual bank deposits and unsubstantiated expense deductions. Then, meet with the IRS on the designated interview date and respond to all questions in a transparent manner.
3. Address any additional information requests.
Do your due diligence to ensure everything has been submitted and wait for the IRS to complete its investigation.
4. Review the response from the IRS.
Ultimately, the IRS will either reach a no-change conclusion or propose changes to your return(s). If changes are proposed, you’ll receive a report detailing them, and you will be given 30 days to agree or disagree.
5. Respond to the IRS.
If you disagree with the proposed changes, you can request an appeal with the IRS. After 30 days, the IRS will send you a Statutory Notice of Deficiency letter, which closes the audit and allows you to petition the U.S. Tax Court.

If you need assistance dealing with an audit, you can hire a licensed tax professional that provides audit representation services. In the case of office and field audits, this is highly recommended.

What Do I Need To Provide?

The IRS will specifically outline the documents and records it requests. But you can refer to their list of common audit record requests for a more detailed understanding. The IRS accepts some of these records electronically depending on the circumstances. If you are being audited and would like to avoid the hassle of compiling hardcopy documentation, contact your auditor to assess your options.

How Long Does an IRS Audit Take?

Generally, once you file a return, the IRS has three years to begin an audit. Most audits are initiated within a year of filing, and most are completed in less than a year.

How To Avoid a Tax Audit

To avoid a tax audit, be sure to prepare your tax return(s) in compliance with the Internal Revenue Code. This entails embracing a methodical approach and conducting research as necessary.

Utilizing tax preparation software can streamline the process and eliminate the prospect of making simple mathematical errors. Nevertheless, for individuals with complex personal finances, it’s recommended to leverage a licensed tax professional.

Other Frequently Asked Questions About IRS Tax Audits

What is the chance of being audited by the IRS?
According to IRS data, less than 1% of all individual tax returns are audited. From tax years 2010 to 2019, audit rates of individual income tax returns declined for all income levels, falling in aggregate from 1.0% to 0.25%. Incidentally, most audits were handled via mail.
What happens if I get audited, but don’t have receipts?
If you get audited, but do not have all the receipts, the IRS could disallow the unsubstantiated deductions. This is bound to increase your taxable income and tax obligation and could result in interest and penalties.

As a result, it’s in your best interest to do everything you can to recreate the receipts. This means asking vendors for receipts and meticulously reviewing your bank and credit card statements to find line items that can substantiate your deductions.

The IRS offers businessowners more leeway than individuals. Businessowners can claim expense deductions without receipts, if the expenses are reasonable for the business. To demonstrate this, you must maintain detailed accounting records and financial reports.
How far back can the IRS audit?
Generally, the IRS can audit any return filed within the last three years. If a substantial error is identified, the IRS can extend its focus. Usually, the IRS will not delve into information older than six years.
How long should you keep your tax records in case of an audit?
The law requires you to keep all records you used to prepare your tax return for at least three years. However, in certain situations, audits can look back six years. If you are self-employed or have passive streams of income, you should maintain records for at least six years.
What does an IRS audit letter look like?
The IRS uses a variety of issue-specific letters to inform taxpayers of imminent audits. Generally, each letter communicates the IRS’ intention, describes the nature of the audit, provides pertinent contact information and highlights a deadline for making contact and setting up an initial interview. Some letters also outline the documentation requirements while others reference supplemental forms.

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Last Modified: March 20, 2023

4 Cited Research Articles

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  1. Internal Revenue Service. (2023, January 25). Earned Income Tax Credit (EITC). Retrieved from https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit-eitc
  2. Internal Revenue Service. (2022, May 26). IRS Statement — Updated IRS Audit Numbers. Retrieved from https://www.irs.gov/pub/irs-utl/statement-for-updated-audit-rates-ty-19.pdf
  3. Internal Revenue Service. (2022, March 3). IRS Audits: Records We Might Request. Retrieved from https://www.irs.gov/businesses/small-businesses-self-employed/audits-records-request
  4. TaxAudit.com. (n.d.). Sample Tax Audit Letters & Notices: IRS Letters. Retrieved from https://www.taxaudit.com/sample-audit-notices-and-letters#irsLetters