What Triggers an IRS Audit and How to Prepare

An IRS audit is not always an adversarial event — it’s the IRS’s method for confirming that returns match reporting from employers, banks, and other third parties and that deductions are claimed correctly. Triggers fall into four broad categories: automated data-matching flags (third-party income reports), disproportionate deductions relative to income, unusual or inconsistent patterns year over year, and random or statistical selection based on IRS models (IRS, How the IRS selects returns for examination: https://www.irs.gov/businesses/small-businesses-self-employed/how-does-the-irs-select-returns-for-examination).

In my practice advising clients for more than 15 years, I’ve found that most audits stem from preventable recordkeeping or reporting issues rather than intent to mislead. Proper documentation, clear bookkeeping, and a calm, timely response reduce the chance an audit becomes costly or protracted.

Types of audits you may see

  • Correspondence audits: The IRS requests documentation by mail about specific items. Most individual audits are correspondence audits.
  • Office audits: The taxpayer or representative meets with an IRS examiner at a local IRS office to discuss limited issues.
  • Field audits: A more comprehensive review where an examiner visits a business or tax preparer; this is common for more complex returns or larger businesses (see: What Happens at a Field Audit: Preparation and Day-of Procedures).

Each audit type uses the same basic approach: notify, request, review, determine, and (if needed) appeal.

Common audit triggers (practical view)

  • Unreported income: Income reported to the IRS on W-2s or 1099s that doesn’t appear on your return. Third-party reporting is a frequent cause.
  • Disproportionate deductions: Charitable gifts, business expenses, or home-office deductions that look unusually large compared to reported income.
  • Round numbers and patterns: Repeatedly rounded figures or identical amounts across years can attract scrutiny.
  • Cash-heavy businesses: Industries that operate largely in cash (restaurants, salons, certain trades) often draw closer attention.
  • Large or unusual losses: Ongoing losses from a business where the taxpayer’s lifestyle suggests the business is not operated for profit.
  • Random selection and statistical models: The IRS uses scoring systems and algorithms to pick returns for review, so even accurate returns can be selected (IRS, How the IRS selects returns).

Immediate steps if you receive an audit notice

  1. Read the letter carefully: IRS notices explain the audit type, the tax year involved, and what documentation is requested.
  2. Confirm it’s legitimate: The IRS contacts taxpayers by mail, not by phone or email, to start an audit. If in doubt, verify the notice by contacting the IRS and referencing the contact info on IRS.gov. (See IRS official guidance at https://www.irs.gov/.)
  3. Do not panic or ignore deadlines: Missing response dates can lead to default adjustments and penalties.
  4. Assemble documentation: Gather the records requested; if the notice is limited, provide only what’s asked for. For broader reviews, prepare a full packet of substantiation.

Practical document checklist

  • Wage and income documents: W-2s, 1099s, K-1s, and brokerage statements.
  • Bank and credit card statements that match reported deposits and expenses.
  • Receipts and invoices for claimed deductions (charitable gifts, business expenses, repairs, travel).
  • Mileage logs and calendars supporting business travel or home-office use.
  • Proof of business purpose: contracts, client invoices, emails, appointment books.
  • Prior-year tax returns and schedules to show patterns.

For correspondence audits, organize documents by issue, include a brief cover letter, and number pages. A clear, professional package reduces back-and-forth and speeds resolution. See our sample checklist and response template: Preparing for a Correspondence Audit: Document Checklist and Sample Response Letter.

How the IRS evaluates your response

Examiners compare your supporting documents to what you reported on the return and to third-party information. They may propose changes (known as a notice of proposed adjustment). If you accept, you’ll receive an explanation and a bill if you owe additional tax. If you disagree, you can appeal the determination (IRS Office of Appeals: https://www.irs.gov/appeals).

Timeline and statute of limitations

  • Generally, the IRS has three years from the date the return was filed to assess additional tax.
  • If the IRS believes you omitted more than 25% of your gross income, the assessment period can extend to six years.
  • There is no statute of limitations if the IRS alleges fraud or if a return was not filed.

These are long-standing IRS rules, summarized on the IRS website (see IRS guidance on assessment time limits at https://www.irs.gov/). Keep records for at least seven years for complex issues or when substantial income is involved.

When to hire representation

You may want professional representation when:

  • The proposed adjustments are large or complex.
  • The audit involves legal issues (e.g., business classification, substantial related-party transactions, fraud allegations).
  • You prefer a tax professional (CPA, enrolled agent, or tax attorney) to handle communications and negotiations.

A representative can prepare the audit file, negotiate collection alternatives, and, if necessary, represent you at appeals. In my experience, engaging a tax professional early prevents miscommunications and reduces the chance of costly concessions.

Appealing an audit outcome

If you disagree with the examiner’s findings, you can request a conference with the examiner’s manager and then appeal through the IRS Office of Appeals. Appeals are independent of the examining function and focus on resolving disputes without litigation (IRS Office of Appeals: https://www.irs.gov/appeals). If appeals fail, you retain the right to take your case to U.S. Tax Court or pursue civil litigation.

Practical recordkeeping and prevention tips

  • Reconcile third-party reports: Make sure W-2s, 1099s, and brokerage 1099s match your tax return each year.
  • Keep contemporaneous records: A dated mileage log, invoices, and receipts are far stronger than a reconstructed file after the fact.
  • Separate business and personal finances: Use dedicated business accounts and cards to substantiate business activity.
  • Use consistent bookkeeping: Regular bookkeeping (monthly reconciliations) reduces errors and highlights unusual entries before filing.
  • Avoid overclaiming: Be conservative and realistic when estimating business-use percentages or charitable deductions.

Common misconceptions

  • Myth: “Only fraudulent taxpayers are audited.” Reality: Many audits result from matching issues or random selection.
  • Myth: “An audit always leads to penalties.” Reality: Many audits result in no change or an adjustment without penalties if the taxpayer cooperates and can document positions.
  • Myth: “Phone calls from the IRS are how audits start.” Reality: Initial audit contact comes by mail. Phone calls demanding payment or threatening immediate arrest are scams — verify via IRS.gov.

Working with state tax authorities

A federal audit can prompt state tax reviews because states often use federal data. Coordinate representation and documentation across federal and state filings to avoid inconsistent positions (see related guidance on state vs. federal audits: https://finhelp.io/glossary/state-vs-federal-audits-key-differences-and-coordination/).

Extra resources and where to learn more

Also see our related FinHelp guides: How the IRS Determines Audit Selection: Algorithms and Criteria and Preparing for a Correspondence Audit: Document Checklist and Sample Response Letter.

Final professional tips

  • Respond quickly and professionally. Time is your ally when you provide clear substantiation.
  • Keep communication concise. Provide only the documents requested and a one-page cover letter summarizing what you are sending.
  • When in doubt, consult a qualified tax professional. Representation is often a small percentage of the potential exposure and can preserve options such as appeals or installment agreements.

Professional disclaimer: This article is educational and general in nature and does not constitute personalized tax advice. For guidance tailored to your circumstances, consult a qualified tax professional (CPA, enrolled agent, or tax attorney).

(Author note: The guidance here reflects IRS rules and published resources current as of 2025 and 15+ years of professional practice.)