- A tax audit is when the IRS calls to review a person or corporation's tax filings.
- Audits generally happen on the last three years of tax returns but can go back as far as six years.
- Many factors can increase a person's likelihood of being audited, from high income to rounded and estimated numbers on tax forms.
A tax audit is an investigation into a taxpayer's finances, income, and taxation, conducted by the Internal Revenue Service.
An audit is a double-check of a person or corporation's tax filings, and generally means the IRS goes through financial records, payments, and more with a fine-tooth comb to make sure everything was reported correctly.
Here's what you need to know about tax audits.
What is an IRS audit?
An IRS audit is a review of an individual or business' financial records. There's one main goal of an audit: to make sure that the right amount of federal income tax is paid, and that income and deductions are reported correctly.
In some cases, an audit could result in a person or company paying more taxes. In fiscal year 2023, the IRS reported that it closed more than 582,900 audits, resulting in $31.9 billion of recommended additional tax.
The IRS can only conduct tax audits on fairly recent tax returns. Generally, audits only happen for the last three tax years. However, audits can go back as far as six years in special circumstances.
Types of IRS audits
Correspondence audits
The most common type of audit is a correspondence audit, accounting for about 77% of the audits conducted by the IRS, according to agency data.
This is when the IRS mails a letter to your home requesting more information about credits you have claimed, employee business expenses, self-employment income, and refunds. It is usually limited in scope, according to the Taxpayer Advocate Service (TAS), and involves no more than a few issues that can be addressed by mail or phone.
Field audits
An in-person or field audit can take place at your home, business, in a local IRS office, or at the office of your attorney or accountant. About 22% of audits are conducted in the field. These generally happen when a more thorough examination of your financial records is needed. Sometimes it may only take a day; other situations call for multiple days of investigation and include site visits and interviews.
Common triggers for an IRS audit
Your chances of being audited are slim — fewer than one in 10 taxpayers was audited for returns filed between 2013 and 2021, the IRS reported.
Tax audits can happen to anyone, but are most common on extreme ends of the income scale, according to a report from ProPublica. It happens most often to the ultra wealthy and the very poor, and less often to middle-income earners.
Taxpayers are selected for an audit one of two ways, according to the IRS website. Some people are selected for auditing through computer screening with a formula, though the IRS says that people can be chosen at random through this method. Additionally, anyone with a financial relationship to another person who's being audited could also be chosen for auditing.
Red flags to avoid
Things like rounded, even numbers on a return, rental income, and unusual or excessive business expenses can increase a person's chances of being audited.
Not reporting all your income, such as neglecting to report money you made through a side gig on a payment app that reports to the IRS (like Venmo), could also increase your chances of being audited.
ProPublica's reporting found that in 2017, people claiming the earned income tax credit (EITC) — a tax credit for low- to moderate- income families — were audited twice as frequently as a household earning $200,000 to $500,000 per year. Since the EITC is often claimed in error, it attracts scrutiny for audits.
What to do if you're audited by the IRS
Always open and carefully read any IRS mail you receive. The letter or notice will list instructions you need to follow and deadlines. There will be an IRS phone number listed on the letter or notice that you can call if you have questions.
If you are being asked to submit additional documentation or financial records, you must do so promptly and by the deadline listed. Here's a list of common records the IRS requests during an audit.
If you are being asked to appear for an in-person appointment, there may be a date, time, and located already scheduled. If you need to change the appointment, be sure to do so ahead of time. You'll be asked to bring specific documents with you to the meeting that will be examined closely by an IRS agent.
The Taxpayer Bill of Rights explains your rights during an audit, including the right to representation. That means you can bring your attorney, certified public accountant, or enrolled agent to any in-person appointment.
Consequences of an IRS audit
In the end, the IRS says that there are three possible outcomes from an audit:
- No change: If everything on the return is accurate according to the investigation, there may not be any changes made.
- Agreement: If the audit finds that a taxpayer underreported their income or underpaid their taxes, they could be required to pay more, including penalties and interest in some cases.
- Disagreement: If the taxpayer disagrees with the findings, they can dispute them. Disputing the charges often means filing an appeal where the case is re-reviewed.
An audit can go on for a long time — the IRS says the timeframe depends on availability to schedule meetings, if there are disagreements with the findings, and how much information is needed.
While someone who only earns income from a job may have relatively little information to supply, the owner of an international corporation will have lots more information to track down, and an audit will take longer.
FAQs about tax audits
What are the chances of being audited by the IRS?
The chances of being audited by the IRS are low for the average American (less than 1%), but they become higher the wealthier you are. Low-income people may also have increased chances.
What should I bring to an IRS audit?
You should bring to an IRS audit the exact documents requested in your letter or notice that was mailed to your home. This can include receipts, payslips, and other financial records. If you have questions about what to bring, call the phone number listed in your correspondence.
How long does an IRS audit take?
There is no clear timeline for how long an IRS audit takes. It depends largely on the complexity of your situation, the taxpayer's and the IRS' availability to schedule meetings, and the IRS' findings and whether the taxpayer agrees or disagrees.
What happens if I disagree with the IRS audit result?
If you disagree with an IRS audit result, you can file a dispute, which typically leads to a reexamination of your case.
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