What Happens When the IRS Audits You?

When the IRS audits you, it will notify you by mail and typically, ask you to provide information. When you receive an audit notice, you may be tempted to ignore it and hope it’s a mistake, but it is important to respond promptly. In many cases, the issue is easy to resolve. By delaying, you will make your tax problems more difficult and costly to fix. Instead, it’s best to contact a tax attorney for advice. While an audit is stressful, here are a few things you should know about what happens when the IRS audits you.

What Happens Before the IRS Notifies You of an Audit?

The audit has essentially started even before you received notice. Generally, what triggers an IRS audit is a tax return with an error or discrepancy, such as a mathematical mistake, incomplete information, mismatch between what the taxpayer reported and data the government has in its database and other problems. The IRS also flags returns using statistical tools that look at whether your return deviated from national norms.

If your return is selected for audit, before contacting you, the auditor will typically conduct internet research on you, review reports from asset locator services, and compare information from third-party reporters to what you reported on the return. The examiner will also review your returns to identify large or unusual items and prepare a three-year comparative analysis of your returns. In addition, the auditor will look at your current financial situation and collectability and prepare a cash analysis to determine if you have sufficient income to meet your expenses. The IRS does a significant amount of analysis of your situation before it contacts you so it can determine the scope of the audit and whether it is worth pursuing based on various circumstances. For example, the auditor may choose to “survey” the return as not warranting further examination based on his or her analysis and other factors.

How Is an IRS Audit Conducted?

There are three main types of audits: correspondence examinations, which are conducted through the mail; service center (or office) examinations, which occur in the IRS office closest to the taxpayer’s residence; and field examinations, which are conducted at the taxpayer’s home, place of business, or accountant’s office. Each of these has its own procedures and forms for notification.

The initial notice letter in the mail will provide all contact information and instructions.

The IRS will provide you with a written request for specific documents. These may include receipts, bills, canceled checks, loan agreements, legal agreements (e.g., purchase/sale, divorce settlement, etc.), medical and dental records, insurance reports, employment documents, diaries, schedule K-1 and other evidence of your income, expenses and itemized deductions. The IRS may accept some electronic records that are produced by tax software.

You should consult a tax attorney when dealing with the IRS because audits have strict rules, procedures and deadlines. An IRS lawyer can ensure that you respond appropriately and promptly, assist you in presenting a persuasive case and advocate on your behalf.

How Long Does an IRS Audit Take to Complete?

Generally, the IRS attempts to complete audits of individual tax returns within 26 months of filing. For business returns, the period is within 27 months of filing. However, the length varies depending on the type and complexity of the audit, the availability of information requested, and whether you agree with the IRS’ findings.

How Does the IRS Conclude an Audit?

The IRS will notify you of its decision when the audit is concluded. The notice will indicate one of three options:

• No change: you substantiated your tax return and there are no changes.
• Agreed: the IRS proposed changes and you understand and agree with the changes.
• Disagreed: the IRS proposed changes and you understand but disagree with the changes.

You have 30 days to respond.

If you agree with the findings, you will sign the report and select a payment option if you owe money.

If you disagree with the findings, you can request a conference with an IRS manager, seek mediation or file an appeal if there is enough time remaining on the statute of limitations.

Should You Retain a Tax Attorney?

Audits are stressful even when you know you are right and have proof that your tax return is correct. The best thing to do is to work with a tax attorney who can help resolve your audit efficiently and reduce your anxiety.

Contact us if you have a tax problem. We have over 25 years of experience successfully assisting taxpayers with IRS audits.