A notice from the IRS that you are getting audited is something that nobody wants to receive, but here’s the truth: an audit notice doesn’t necessarily mean you did something wrong. It simply means that the IRS wants to take a closer look at your return. The IRS audits for all kinds of reasons, and plenty of audits end with zero changes owed. So, if you’re facing an audit from the IRS, you are not in trouble. You just need a plan. This guide will cover exactly what to do if you are audited by the IRS, from understanding why it happened to the clear steps that you can take to get through the process with confidence. 

What is an IRS audit? 

An IRS audit is a review of your tax return and financial records that is done to ensure that the information reported is accurate, and the right amount of tax was paid. It is not a criminal investigation, nor is it an assumption of guilt. It is simply the IRS requesting to take a closer look at the numbers or requesting more information for greater clarity. 

The IRS selects returns for audit in a few different ways. Some are chosen through random selection, using a statistical formula that flags returns that look unusual compared to similar returns. Others are pulled because of one’s connection to another taxpayer who is being audited, such as a business partner or investor. And some are flagged by the IRS’s automated systems as they scan for things like mismatched income figures across W-2s and 1099s or deductions that look abnormal for a given income level. Read on for common IRS audit triggers. 

But first, here’s a bit of perspective: IRS audits are very rare, increasingly so. According to IRS data, less than 0.50% of individual returns were selected for audits between 2020 and 2023, and this was the lowest published audit rate since 1950. So, the chances that you will be audited are rare, and going down. That being said, if you’re reading this because you just received a notice, you’re in the right place. This guide will help you figure out what to do if you are audited by the IRS.

Common Triggers of an IRS audit 

As we’ve mentioned, receiving an audit notice doesn’t automatically mean that you made a mistake. Sometimes it really is random. But there are certain things that tend to catch the IRS’s attention, and it’s helpful to know what they are. Here are some of the most common triggers of an IRS audit: 

Significant changes in income: A big jump or drop in income from one year to the next can raise eyebrows, especially if there is no event, such as a job change or the sale of a business, to explain it. 

Inconsistent reporting: The IRS also receives copies of your W-2s and 1099s from employers and financial institutions, so if the numbers you report don’t line up with the numbers they have on file, the mismatch will get flagged automatically.  

Unusually high deductions or business expenses: If you have unusually high deductions on your personal return such as large charitable contributions or medical expenses, or inflated business expenses like vehicle use, meals, and home office costs on your business return, the IRS is likely to flag it.  

Schedule A, C, or E filers: The IRS closely scrutinizes returns that are more likely to contain errors, and that has historically been the case for small business owners filing Schedule A (Itemized Expenses), Schedule C (Business Expenses) and Schedule E (Supplemental Income) forms. 

Earned income tax credit (EITC) claims: The EITC is a tax credit designed to help low to moderate income workers keep more of what they earn. It can add up to thousands of dollars, depending on your income and family size. It’s one of the most valuable credits available for working Americans, but it is also one of the most closely monitored, and the IRS knows that errors are common in these claims. So, if you claim the EITC, be sure that everything you’re reporting can be backed up with the right paperwork.  

The Three Types of IRS Audit 

There are three kinds of audits, and the type you receive will inform what to do if you are audited by the IRS.

Correspondence audit: This is the most common type, and it happens entirely by mail. In this type of audit, the IRS is typically just asking you to verify a specific item on your return, like a deduction or piece of income, and you are asked to respond with the proper documentation. These types of audits are often resolved quickly and seamlessly. 

Office audit: This type of audit requires a meeting with an IRS representative at a local IRS office. It is usually more in-depth and thorough than a correspondence audit, so having your records organized and knowing what the IRS is looking for before you walk in can make a big difference. 

Field audit: This is the most comprehensive type of IRS audit, where an IRS agent comes to you either at your home, your place of business, or your tax preparer’s office. Field audits are usually reserved for more complex situations, so professional representation is strongly recommended in this instance. 

What to Do If You Are Audited by the IRS 

Getting an audit notice is stressful, but having a clear plan of response makes it manageable. Here is what to do if you are audited by the IRS: 

Read the notice carefully. Take a deep breath and read the notice from top to bottom. The IRS will tell you exactly what tax year is under review, what items they are looking at, and what they need from you. 

Respond promptly. Every audit notice will come with a deadline, and missing it gives the IRS the opportunity to make decisions without your input, which rarely works in your favor. If you need more time, you can request an extension, but be sure to do so in writing before the deadline passes. 

Gather necessary documentation. Pull together everything that is relevant to the specified items under review. This most likely will include the tax return of the specified year, bank statements, proof of income and documentation for deductions and/or expenses claimed. Be sure to provide copies and hold on to your originals for easy access. 

Be honest, and stick to what is being asked. When the IRS asks questions, answer honestly. Misrepresenting information to an IRS auditor is a federal crime. That being said, you’re only responsible for answering the questions that are being asked. Volunteering information outside the scope of the audit can open more doors for investigation that you don’t want opened.  

File any outstanding returns. If you have missing or unfiled returns from previous years, be sure to file them before your audit meeting, otherwise the IRS can file a substitute return on your behalf. If this happens, they will not claim any deductions, credits, or dependents for you which can lead to a much larger tax bill than necessary. 

Know your rights. The IRS Taxpayer Bill of Rights spells out a set of fundamental rights to be aware of when dealing with the IRS, including the right to representation, to appeal, to privacy, and to pay only what you actually owe.  

Get a tax professional in your corner. Working with a trusted professional who has your best interest in mind can make all the difference when navigating an IRS audit. They can communicate with the IRS on your behalf, help you organize your documents, and make sure that your rights are protected throughout the process. The more complex or high stakes the audit (such as a field audit, as we mentioned), the more important this becomes. 

What Happens After an Audit? 

Once the IRS wraps up their audit, there are three possible outcomes: 

• No change: Your return checks out and you do not need to do anything more. 

• Agree and accept: The IRS proposes changes, and you sign off on them. If money is owed, you can typically negotiate a payment plan or file for an Offer in Compromise (OIC) or Currently Non-Collectible (CNC). 

• Disagree and challenge: You do not accept the IRS findings and want to challenge them. In this instance, you have a few options. Within 30 days of receiving the IRS’s determination letter, you can request a conference with the Independent Office of Appeals, a body that operates separately from the IRS and exists specifically to resolve tax disputes fairly and impartially for both sides. For disputes involving $25,000 or less, you can file Form 12203 to request that review. For larger or more complex cases, you will need to submit a formal written protest outlining what you disagree with and why. If you miss that 30-day window, the IRS will issue a Notice of Deficiency, at which point you have 90 days to either pay the tax owed or file a petition with the U.S. Tax Court.  

Reduce Your Audit Risk Going Forward 

The best time to think about an IRS audit is long before one ever shows up. Maintaining organized financial records year-round, reporting all income accurately, and making sure that your W-2s and 1099s match what is on file goes a long way. So does being consistent with your reporting from one year to the next, and avoiding any deductions or expenses that you can’t back up with documentation. 

But the most effective thing you can do? Stop treating taxes like once-a-year event, and start viewing them as more of a year-round strategy. Most audit triggers come down to something that could have easily been caught, corrected, or planned around with the right tax guidance in place throughout the year. 

That is exactly what PaulHood is built for. When you work with PaulHood, you get a whole team of specialists who know your unique situation, watch for potential issues before they become problems, and stand by your side if an audit does come your way. And if you’re already trying to figure out what to do if you are audited by the IRS, our tax resolution services are here to help you navigate it with confidence. 

Schedule time to connect with a PaulHood tax professional today.