Oh No! I’m Being Audited by the Internal Revenue Service (IRS)

Fewer than 1% of all tax returns face examination, so why ME?

Why Me?

The IRS uses automated computer scoring systems and random sampling to choose which files to examine. Computers compare your return against statistical norms for your income bracket.

• Unreported Income: Forgetting to include forms like W-2s or 1099s creates an immediate mismatch.
• Large Deductions: Claiming charitable donations, business travel, or vehicle write-offs that look unusually high compared to your reported earnings can raise flags.
• Hobby vs. Business: Consistently reporting losses on a side business while keeping personal lifestyle benefits active often triggers a closer look.
• Random Selection: Some returns are chosen purely through statistical random sampling to update compliance data.

When you are selected, the notification arrives via physical mail—never by phone call, text, or email. Those are the scammers. 

When you receive that notice, it will let you know what format your audit takes.

• Correspondence Audit: Conducted entirely through the mail. These are usually because documents were omitted, and your notice will say something like “our records are different than your return. Here’s our calculation of the impact; and do you agree?”. A correspondence audit may also ask for documents to support a deduction.
• Office Audit: Requires you to visit a local IRS office to sit down with an examiner and present records for specific line items.
• Field Audit: The most comprehensive review. An agent comes directly to your home, business place, or accountant’s office to conduct a deep inspection of your financial accounts and tax information.

How Far Back Can They Go?

The standard statute of limitations allows the agency to review returns filed within the last three years. However, exceptions apply:

• If they find a substantial error—such as understating gross income by more than 25%—they can expand the window to six years.
• In cases involving suspected fraud or failure to file a return at all, there is no time limit.

So What Do Should I Do?

Staying calm is your best strategy. Read the notice carefully to identify the specific tax year and the items under review. Maybe it’s just an overlooked document that can be easily explained. Maybe it’s a form that wasn’t filed. And it could be an error by the IRS. I’ve seen it happen. Even in a correspondence audit, you may want to have it looked at by a professional such as a Certified Public Accountant (CPA) or an Enrolled Agent (EA).

If it’s something more complex,

• Gather Documents: Collect bank statements, logbooks, receipts, and original tax forms. Never create new documents after the fact.
• Be Organized: Present your records neatly in folders or binders so the auditor can easily trace numbers from your receipts to the line items on your tax return. This is important, as I have found it adds credibility to your positions.
• Hire a Professional: For complex office or field audits, consider representation from a CPA, an EA, or tax attorney.

A few recommendations on reducing your chances of an audit or easing the pain if you are,

• Match your life with your tax documents. Have a job? Make sure you have a W-2. Investments? Look for 1099-DIV, 1099-INT and 1099-B documents. Self-employed? You may get 1099-NECs. Rental property? 1099-MISC.
• If you own a business, keep good records (including vehicle information, but that’s another whole topic), and keep your business and personal finances separate.
• As mentioned above, be organized.
• If you have an unusual event, such as a large charitable cash donation or large non-cash donation, attach the supporting documentation to the original return when filing.

Lastly, Know Your Appeal Rights.

If you disagree with the final findings, you have the right to request a conference with an IRS manager or take your case to the U.S. Tax Court.

If you would like to discuss any of this information or other tax-related topic, feel free to reach out to me at 520-794-4868.