What Is an IRS Tax Audit?

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.

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.

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

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.

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.

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.

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.

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.

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.

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.