Quick overview

An IRS audit is an exam of a tax return and supporting records to determine whether a taxpayer reported income and deductions correctly under federal tax law. Audits range from a simple mail question about one line on a return to in-depth on-site inspections of business records. The IRS publishes general guidance on audits for small businesses and individuals (IRS: Audits and the Audit Process).

In my practice as a CPA with 15 years of tax-preparation and audit-defense experience, I’ve seen audits resolved quickly when taxpayers provide clear documentation and drag out when records are missing or inconsistent. This article breaks audit types, the step-by-step process, common triggers, likely outcomes, and practical steps to prepare and respond.

Types of IRS audits (what to expect)

  • Correspondence audit: A mail-only review focused on specific items (e.g., a deduction or income mismatch). These are the most common and least invasive.
  • Office audit: A meeting at a local IRS office where an agent reviews items in more detail than a correspondence audit.
  • Field audit: The most comprehensive; an agent visits your home or business to inspect books, invoices, and other records.
  • Virtual audits: Increasingly, the IRS offers remote document submission and video conferences—expect secure portals or mailed instructions.

Each type differs by scope and time commitment. Correspondence audits are often resolved within a few months; field audits can take many months to a year depending on complexity.

For a focused how-to on preparing a mail response, see our guide: Preparing a Response Package for an IRS Correspondence Audit (FinHelp).

What commonly triggers an IRS audit?

  • Discrepancies between information returns (W-2s, 1099s) and your reported income.
  • Deductions or credits that are large relative to your income (e.g., large charitable giving vs. wages).
  • Repeated losses on Schedule C for a business that appear non‑commercial.
  • High income—returns above certain thresholds receive more scrutiny.
  • Random selection based on statistical formulas used by IRS computer systems.

The IRS uses a mix of automated filters and human review. A return flagged doesn’t mean wrongdoing — often it means the return needs clarification.

The audit process: step by step

  1. Notification
  • The IRS initiates an audit in writing. It will not call you out of the blue and will never demand immediate payment by phone. Common letters include CP49 (audit notification) and an audit appointment letter. If you get a call, ask for a written notice and verify by calling IRS customer service.
  1. Scope and request
  • The notice will describe the audit type and list records the agent wants to see. Do not volunteer extra records beyond what’s requested unless they directly support the item under review.
  1. Evaluation and documentation
  • Gather supporting documents: receipts, invoices, bank statements, ledgers, canceled checks, signed contracts, and third‑party documents (1099s, W‑2s). Keep a clear cover sheet identifying which return, year, and line item each document supports.
  1. Meeting or submission
  • For correspondence audits, mail the package as instructed with a return receipt. For office/field audits, bring organized copies and originals if requested. You may bring a representative (CPA, enrolled agent, or tax attorney).
  1. Agent findings and report
  • The agent will review records and propose changes if discrepancies exist. You’ll receive a report or proposed adjustment detailing additional tax, interest, and penalties if applicable.
  1. Resolution options
  • Accept the findings and pay, negotiate (if reasonable cause or mitigation exists), or appeal through IRS Appeals or the U.S. Tax Court. Appeals are generally separate from collection.

The IRS Appeals Office is available if you disagree with the agent’s findings (see IRS Appeals). Time limits to request an appeal are short—often 30 to 60 days—so act promptly.

Typical outcomes and potential costs

  • No change: The audit closes with no adjustments.
  • Agreed changes: You accept additional tax owed and pay tax plus interest and any penalties.
  • Unagreed changes (appeal): You file a protest and potentially settle through Appeals or litigate in Tax Court.

Penalties and interest:

  • Interest accrues on unpaid tax from the original due date.
  • Accuracy-related penalties can be 20% of the underpayment for negligence or substantial understatement.
  • Fraud penalties can reach 75% of the underpayment when fraud is proven.

Knowing the difference between a reasonable interpretation and negligence is key. Good documentation and timely, accurate amendments can avoid or reduce penalties.

Records to keep and how long

  • General rule: Keep tax returns and supporting documents for at least three years from the date you filed or the due date of the return, whichever is later (this is the typical statute of limitations for assessment). If you omitted more than 25% of income, the IRS has six years to assess. There is no limit if fraud or no return was filed.
  • Keep payroll records, receipts, sales records, canceled checks, mortgage interest statements, and proofs of charitable contributions.

For a practical checklist, see our recordkeeping guide: Recordkeeping Best Practices to Survive an IRS Audit (FinHelp).

Practical tips: how to improve your chances and reduce exposure

  • Be organized: Create an audit binder with year, return, and labeled documents. A table of contents saves the agent’s time and demonstrates good faith.
  • Be honest and concise: Stick to requested items. Admit errors and offer corrected returns when appropriate—amending voluntarily often reduces penalties.
  • Use representation: If you feel uncomfortable, hire a CPA, enrolled agent, or tax attorney. If you hire someone, provide a signed Form 2848 (Power of Attorney) so your representative can communicate with the IRS on your behalf.
  • Don’t overshare: Only supply documents related to the items under audit. Extra information can create new areas to review.
  • If you can’t pay, consider installment agreements or an Offer in Compromise; these are collection options, not audit negotiations, but help with resolution after liability is established.

See our guide on appeals if you disagree with adjustments: How to Appeal an IRS Audit Determination: Steps and Timelines (FinHelp).

Common mistakes and misconceptions

  • “If I’m audited I must owe taxes.” Not true — many audits confirm the return as filed.
  • “I should give the IRS everything they ask for immediately.” Provide what’s requested, in the order and format the IRS asks. Ask questions if the request is unclear.
  • “The IRS will threaten immediate jail or seizure without notice.” The IRS follows legal procedures; threats of immediate enforcement are often scams.

When to hire a professional

  • Complex returns (S‑corporations, partnerships, trusts).
  • Large proposed adjustments or fraud allegations.
  • If you are unfamiliar with audit procedures or uncomfortable dealing with agents directly.

In my work, a well-prepared representative can often shorten the audit and limit adjustments because we know how to present records and the legal standards that apply.

Timeline and statute of limitations

  • Assessment statute: Generally three years from filing. Six years if you omitted >25% of gross income. No limit for fraud or failure to file.
  • Appeals and collection: Appeals requests must be timely; collection can continue if tax is assessed and unpaid. Always check dates on IRS notices and act before deadlines.

Sample audit response checklist (short)

  • Copy of the tax return under audit
  • Letter of appointment or IRS notice
  • Organized supporting documents labeled to match return lines
  • A cover letter explaining the documents submitted
  • Contact information for taxpayer and representative

FAQ (brief)

Q: Can the IRS audit past three years?
A: Yes—if they allege substantial omission of income (typically six-year window) or fraud, or if no return was filed.

Q: Will an audit affect my refund in future years?
A: If the audit results in additional tax owed, it may change carryforwards, credits, or refund amounts in later years.

Q: Can I speak directly to the auditor without representation?
A: Yes, but you may want representation if the amounts or complexity make that a risky choice.

Closing notes and disclaimer

This article explains the IRS audit process and provides practical, actionable advice based on common practice and IRS guidance (IRS: Audits and the Audit Process; IRS Appeals). It is educational and not a substitute for tailored legal or tax advice. For personal tax issues, consult a qualified tax professional or the Taxpayer Advocate Service if you need an independent advocate (Taxpayer Advocate Service).

Authoritative sources

Internal resources

Professional disclaimer: This content is for educational purposes and does not constitute legal, tax, or financial advice. Consult your CPA, enrolled agent, or tax attorney for guidance specific to your situation.