Introduction
An IRS exam—commonly called an audit—is a review of your tax return and records to confirm that the income, deductions, and credits you reported are correct. The IRS uses multiple methods to select returns for review, and not all audits are equal: most start as correspondence (mail) audits and only a small percentage become field (in‑person) audits. Understanding what triggers each type helps you prevent problems and respond quickly if contacted.
How the IRS Selects Returns (Quick Overview)
- Information matching: The IRS compares the income, interest, dividends, and other items you report with third‑party forms (W‑2, 1099, 1098). Significant mismatches often prompt a notice or audit (see IRS guidance on information returns).
- Computer scoring and filters: The IRS uses algorithms and scoring systems to flag returns with anomalies, outlier deductions, or unusual patterns relative to peers.
- Related examinations: Changes to one taxpayer’s return can trigger audits of related taxpayers (e.g., business partners, investors, spouses).
- Leads and complaints: Tip lines, whistleblower information, and referrals from other agencies can cause an audit.
- Random selection and research projects: The IRS occasionally selects returns for statistical and compliance research.
(Author note: In my CPA practice I’ve seen that most audits are data‑driven and solvable with timely documentation. The more organized your records, the easier a correspondence audit will be to resolve.)
What Is a Correspondence Audit and What Triggers It?
A correspondence audit is an examination conducted entirely through the mail. The IRS sends a letter asking for specific documents or clarifications — for example, to verify a charitable deduction, unreported interest, or a business expense.
Common triggers for correspondence audits
- Mismatch between your return and a W‑2, 1099, or 1098 (e.g., reported income lower than third‑party data).
- Itemized deductions that are unusually large relative to income, such as high charitable gifts or unreimbursed business expenses.
- Simple math errors or missing forms.
- Credits claimed that require documentation (e.g., education credits, Earned Income Tax Credit).
How correspondence audits work
- You receive an IRS letter (not an email). Letters will explain what information the IRS wants and include a deadline.
- You return the requested documents by mail, fax, or through the IRS portal when available.
- The IRS reviews the materials and either accepts your explanation or proposes adjustments.
Why correspondence audits are common
They are the fastest, lowest‑cost way for the IRS to resolve straightforward discrepancies. Many correspondence audits are resolved without additional contact when the taxpayer supplies clear supporting records.
What Is a Field Audit and What Triggers It?
A field audit is an in‑person review conducted at your home, business, or the office of your tax representative. These are more invasive and time‑consuming and usually occur when the IRS needs to examine multiple years or extensive records, or when it suspects substantial underreporting or fraud.
Common triggers for field audits
- Repeated or large losses on Schedule C for small businesses (especially cash‑based businesses).
- Significant discrepancies between reported income and lifestyle or assets.
- Complex transactions (large capital gains, international activities, backing out related party transactions).
- Pattern of late filings, amended returns, or previous audit adjustments.
- Credible third‑party tips or referrals from other agencies.
How field audits work
- An IRS agent will contact you to schedule an appointment; the IRS usually initiates contact by mail first. The agent may request records in advance.
- The agent examines books, receipts, and ledgers and interviews principals or staff as needed.
- Field audits can cover multiple years and often lead to more in‑depth adjustments than correspondence audits.
- You have the right to be represented by a CPA, enrolled agent, or attorney during the audit.
Key Differences: Correspondence vs Field Audits (At a glance)
- Method: Correspondence = mail; Field = in‑person.
- Scope: Correspondence = specific items; Field = comprehensive, may span multiple years.
- Time and cost: Correspondence = faster and lower cost for both parties; Field = longer and more resource intensive.
- Resolution likelihood: Correspondence audits are more likely to be resolved with documentation; field audits may result in broader adjustments.
Practical Triggers to Watch For (Actionable Checklist)
- Information mismatches: Regularly reconcile your W‑2s/1099s with tax returns before filing.
- Large or unusual deductions: Keep contemporaneous receipts, acknowledgments for charitable gifts, and mileage logs for business use.
- Schedule C risks: Document ordinary and necessary business expenses and separate personal from business transactions.
- Cash businesses: Track deposits and POS records; cash businesses draw IRS attention when income appears underreported.
- Credits and exclusions: Maintain eligibility records for education credits, home office deductions, and dependent claims.
Records and Retention
Keep the documentation that backs your tax return. The IRS generally recommends keeping records for at least three years, but keep six years when there’s a substantial understatement of income (more than 25%) and indefinitely in cases of fraud or when you fail to file. See IRS recordkeeping guidance for details (IRS: How long should I keep records?).
How to Respond When Notified
- Read the letter closely: Identify what is being asked and the deadline. Never ignore correspondence from the IRS. (The IRS initiates contact by mail — not email or text.) [See IRS guidance on how the IRS contacts taxpayers.]
- Gather documents: Pull only the documents requested. Organize them with a cover letter explaining each item.
- Consider representation: For complex or field audits, hire a CPA or tax attorney. If you want someone to speak for you, file Form 2848 (Power of Attorney).
- Respond on time: Late or no responses can result in default assessments, penalties, and interest.
- Keep copies: Send documents by certified mail or use secure upload portals and keep proof of transmission.
When to Hire a Professional
- You’re facing a field audit or multi‑year review.
- Substantial tax, penalties, or potential criminal exposure are at stake.
- You’re unsure what documents to provide or how to frame your explanations.
If you choose representation, your advisor can communicate with the IRS on your behalf, help organize documents, and negotiate adjustments or payment terms.
Appeals and Dispute Options
If you disagree with the audit findings, you have administrative and judicial options:
- Administrative appeal: Request an appeals conference with the IRS Office of Appeals. This is a non‑adversarial process to resolve disputes without going to Tax Court. (See FinHelp’s guide on how to appeal.)
- Tax Court and other courts: If appeals don’t resolve the matter, you may litigate in U.S. Tax Court, U.S. District Court, or the Court of Federal Claims.
Common Mistakes That Trigger or Aggravate Audits
- Ignoring IRS letters or deadlines.
- Providing disorganized or excessive documentation that obscures the requested items.
- Mixing personal and business expenses.
- Forgetting to report taxable income from side gigs or investments.
Real‑World Examples (Illustrative)
- Correspondence audit example: A taxpayer reported charitable contributions that exceeded their typical giving pattern. The IRS requested summary receipts and acknowledgement letters. A clear folder of receipts and the charity’s letter resolved the issue.
- Field audit example: A sole proprietor who reported multiple years of losses was visited by an agent. The agent reviewed ledgers, bank deposits, and invoices to verify whether expenses were ordinary and necessary. The business owner’s failure to maintain separate personal and business accounts increased scrutiny.
Useful Resources and Internal Guides
- For document checklists and practical prep: Preparing for an IRS Correspondence Audit: Records to Gather — https://finhelp.io/glossary/preparing-for-an-irs-correspondence-audit-records-to-gather/
- For general documentation best practices: Preparing for Audit: Documentation and Records to Keep — https://finhelp.io/glossary/preparing-for-audit-documentation-and-records-to-keep/
- If you need details on appealing an audit decision: How to Appeal an IRS Audit Determination: Steps and Timelines — https://finhelp.io/glossary/how-to-appeal-an-irs-audit-determination-steps-and-timelines/
Authoritative sources
- Internal Revenue Service (IRS) — Audit basics and how the IRS contacts taxpayers: https://www.irs.gov
- IRS recordkeeping guidance: https://www.irs.gov/businesses/small-businesses-self-employed/recordkeeping
- Consumer Financial Protection Bureau (CFPB) — general consumer finance protections: https://www.consumerfinance.gov
Professional disclaimer
This article is educational only and does not replace personalized tax advice. Tax situations vary; consult a qualified CPA, enrolled agent, or tax attorney for guidance tailored to your facts and circumstances.
Bottom line
Correspondence audits are usually limited and resolvable with clear documentation; field audits are broader and more demanding. The most effective strategy is prevention: accurate reporting, timely reconciliation of third‑party forms, and organized records. If you are contacted, respond promptly, supply exactly what’s requested, and consider professional representation for complex matters.
