Most Americans would rather face a root canal than an IRS audit. But if you receive an audit notice in the mail, don’t panic. An audit isn’t the end of the world. The more you understand the audit process, the better prepared you’ll be and the more confident you’ll feel. But what does being audited mean?
Consider this your crash course in audit preparedness. You’ll learn about common audit triggers and tips for how to handle the audit process.
So What Does Being Audited Mean, Exactly?
If you are being audited by the IRS, it means that the agency plans to review your tax return and confirm that the information you’ve provided is accurate. The main goal is to determine whether your income, expenses, and credits – which determine the amount of taxes you owe – have been reported correctly.
👉 Learn more: Get to grips with personal taxation by exploring our comprehensive guide on how do taxes work for individuals.
Different Types of IRS Audits
Not all audits are the same. The IRS may perform the following types of audits:
Taxpayer Compliance Measurement Program (TCMP)
The exact procedures of each of these audits are quite different. If you receive an audit notice from the IRS, check to see what type of audit to expect.
How Does the IRS Select Who to Audit?
On average, the IRS audits just 3.8 out of every 1,000 tax returns — yielding an audit percentage of just 0.38%. Still, that may not be terribly reassuring if you’re currently on the receiving end of an audit. According to the IRS, audit selection criteria are based on random selection, computer screening, and auditing returns with a high probability of non-compliance.
What Do I Do if I Receive an Audit Notice?
If you receive an audit notification in the mail, don’t panic. Not all audit types will place you under intense scrutiny. Before you do anything else, check the following:
What is the stated reason for the audit?
Does the letter specify the year being audited?
What type of audit can you expect?
Read this notice carefully, as it will contain important information about why you’re being audited and what to expect. There may also be instructions on what to do next, so read the full letter immediately after you receive it.
👉 Learn more: Find out how to effectively settle IRS tax debt, even if it’s 2, 3, or 4 years old, with our practical guide.
Common Types of IRS Audits
Not every IRS audit is created equal. The IRS uses several different types of audits, each of which has its own level of detail. Here’s what to expect from each type of audit.
Correspondence Audit – A correspondence audit is the simplest type, as well as the most common. Correspondence audits make up 85% of all audits. In this audit type, the IRS will simply send a letter asking for clarification about a portion of your tax return and provide a means for you to send information back.
Office Audit – If the issue is too complex for a correspondence audit, you may receive a letter requesting an “office audit” or a face-to-face audit. In this audit type, you’ll come to an IRS office to answer questions about your tax return. Make sure to bring any documentation about deductions or credits at this time.
Field Audit – Field audits are the least common, though they’re also the most invasive. During a field or office audit, an IRS agent visits your home or office to discuss your return. This is the most comprehensive audit type. It may examine your lifestyle, income, and business activity. You may want to consult an attorney or accounting professional to help you through this process.
Field audits are very rare, and it would be very unusual for you to face one.
Taxpayer Compliance Measurement Program (TCMP) – This rare form of audit is most common among high-income individuals, and it is simply designed to collect statistical data for future audits. The IRS may select specific items for this audit, and you’ll be asked to provide documentation, such as bank statements or receipts, to support your income or deductions.
👉 Learn more: New to filing taxes? Our guide walks you through everything you need to know when filing taxes for the first time.
Common IRS Audit Triggers
While some audits are simply a matter of random selection, the IRS also uses computer systems to flag tax returns for an audit. This can happen due to some of the following common audit triggers.
Math Errors – Always check your math! If you perform a calculation incorrectly, the IRS may flag your return and leave you subject to an audit.
High Income – According to a 2022 report by the Government Accountability Office, higher-wage earners were generally more likely to get audited than those from lower income brackets. Those making more than $500,000 per year were especially more likely to be audited.
Unreported Income – Your employers send forms W-2 and 1099 to both you and the IRS. If your tax return is missing this information, you may receive an audit notice about your unreported income.
Early Retirement Withdrawals – Did you make an early withdrawal from your retirement account? If so, this may also trigger an audit to ensure that you report these distributions accurately.
Related Party Audits – You may receive an audit notice if someone you’re financially connected to receives an audit. A common example would be a business partner. If your business partner submitted a tax return that didn’t comply with established regulations, you may also be audited.
👉 Learn more: Our article explains what happens if you don’t file or pay taxes, and why it’s crucial to stay compliant.
Navigating the Audit Process
What does being audited mean for you? The answer depends on the type of audit you’re facing, but there are still some general things you should do from the moment you first receive the audit notice.
Read the Letter Carefully
First, read the audit notice carefully. Make sure that you understand the key elements of the audit.
What year(s) is the IRS is looking at?
What is the reason for the tax audit?
What type of audit will you be facing?
Look for any specific instructions and/or deadlines that will influence your next steps.
Verify the Letter’s Authenticity
Understandably, you may be concerned that the letter is part of some type of fraud or phishing scam. You can verify the letter by checking the contact information against that of the IRS website or by checking that your name, contact information, and Social Security number are accurate. When in doubt, contact the IRS directly through the information on their website.
Never, ever ignore a letter from the IRS. Doing so can actually worsen the situation. The letter will usually request a response. Respond immediately and provide any requested documentation. In a correspondence audit, this may be all that’s needed to clear up the situation and move forward.
Unfortunately, there’s not much you can do to get out of the audit. Make sure to cooperate to the best of your ability. Be honest about all of your information. Even a hint of hostility or dishonesty could severely hurt your case.
Keep Detailed Records
Save everything the IRS sends you. Organize your records by date. This will help you maintain your own records as well as provide a trail of documentation that you may need if you choose to seek professional assistance.
Seek Professional Help
If you’re facing a complex tax audit, you may not feel comfortable handling it yourself. You can choose to seek the assistance of a CPA or even a tax attorney to be your advocate with the IRS.
How Far Back Can the IRS Go?
Don’t be surprised if you receive an audit notice for a tax year older than your most recent return. The IRS is fully capable of reviewing past returns to determine prior liability.
For Tax Fraud: Forever
There is no statute of limitations for tax fraud or failing to file a tax return. If the IRS suspects you of these crimes, there is no limit to how far back they can investigate.
For Most Audits: 3 Years
The good news is that the statute of limitations is much shorter for other types of audits. The standard rule is that the IRS can look back at the previous three years. Just be aware that this is three years from the due date (usually April 15), so if you file early, the statute of limitations does not begin until the official April deadline.
For Large Errors: 6 Years
Here’s where it gets a little confusing. For large errors, the IRS can go back six years. A “large” omission is more than 25% of your gross income. This extends the statute to a full six years.
Understanding the Lookback Period
Keep in mind that the IRS may or may not actually look back this far. In fact, the IRS website states that most audits cover only two years’ worth of returns. And since correspondence audits (the most common type) are designed to address minor issues, taxpayers can often anticipate a fast turnaround.
Still, it’s always a wise idea to maintain clear, detailed tax records. The good news is that if you use electronic filing systems you can save your financial records indefinitely, so you’re always prepared.
👉 Learn more: Get ahead of tax season with our review of the best tax software providers for 2024, ensuring a smoother filing experience
Consider Professional Help
If you are being audited by the IRS, should you immediately call a CPA or tax attorney? Not necessarily. A simple correspondence audit may be cleared up by providing some additional information. But you might consider reaching out to a professional if any of the following apply.
Office and Field Audits – Though less common, office and field audits are a bit more invasive. You might request a CPA or tax attorney to represent you.
Complex Tax Issues – Does your tax situation involve business expenses, rental income, foreign income, or income across multiple states? If so, a CPA may be able to help you sort through complex tax issues to clear up the audit as smoothly as possible.
Tax Debt – If you’re already aware that you owe tax debt, you might consult a tax professional who can assist you in negotiating a settlement or payment plan with the IRS.
Tax Fraud – A tax attorney can help you if you’re being investigated for tax fraud. At the very least, they can advise you on your rights and help you resolve the situation with minimal legal consequences.
What Does Being Audited Mean for You?
One thing is certain: being audited doesn’t have to mean the end of the world. If you know more about why you’re being audited and what to expect from the process, you can move forward with greater peace of mind.
If you’re not quite sure how to move forward, don’t hesitate to reach out to a professional. It’s important that you get help right away, especially if you’re facing a deadline from the IRS. After all, the sooner you address the audit, the sooner you can get on with life.