How to Handle an IRS Audit

Getting a letter from the IRS telling you that you’re being audited can be stressful and intimidating. But it doesn’t have to be a nightmare. With some preparation and a calm approach, handling an IRS audit can be manageable.

In this blog, we’ll walk you through what an IRS audit is, why it happens, how you should respond, and what steps you can take to make the process as smooth as possible. Whether you’re an individual or a small business owner, these tips will help you handle an audit confidently.

What Is an IRS Audit?

An IRS audit is a review of your tax return to make sure that all the information you reported is accurate. The IRS uses audits to ensure that taxpayers are correctly reporting their income, deductions, and credits. The goal is to verify that you’ve paid the right amount of taxes.

Audits can be triggered for several reasons, such as:

• Random selection: Sometimes the IRS randomly selects returns to audit, even if there’s nothing suspicious.
• Red flags: Certain things, like unusually large deductions or unreported income, can catch the IRS’s attention.
• Third-party information mismatch: If your reported income doesn’t match what employers or financial institutions report, the IRS might investigate.

There are three main types of IRS audits:

1. Mail audits: The IRS sends you a letter asking for more information or documentation to support specific items on your tax return.
2. Office audits: You’ll need to visit an IRS office and bring documentation to support your return.
3. Field audits: An IRS agent comes to your home or business to conduct a review.

Most audits are done by mail, and only a small percentage of taxpayers are audited each year.

Why Me? Common Reasons for IRS Audits

While some audits are random, certain factors can increase your chances of being audited. Here are some common reasons why people are selected for audits:

1. High income: The more money you make, the more likely you are to be audited. The IRS often focuses on high-income taxpayers because there’s more money at stake.
2. Large charitable donations: If your charitable donations are unusually large compared to your income, the IRS may want to verify them.
3. Unreported income: If you forget to report income from side jobs, freelance work, or other sources, the IRS may audit you to collect the correct amount of taxes.
4. Claiming too many deductions: If your deductions, like business expenses or home office deductions, seem excessive, this could raise red flags.
5. Errors or inconsistencies: Simple math errors or inconsistencies between your return and other tax documents (like W-2s or 1099s) can lead to an audit.

Understanding why you might be audited can help you prepare and prevent future issues.

What to Do When You Get an IRS Audit Letter

If you receive an IRS audit notice, it’s important to stay calm and take the following steps:

1. Read the letter carefully: The letter will explain which tax year is being audited and what specific issues the IRS wants to review. Sometimes the audit is only about one or two items, like a deduction or income report.
2. Gather your documents: The IRS will likely request specific documents to support the information on your tax return. This could include receipts, bank statements, W-2s, 1099s, or other records. Organize these documents as neatly as possible to show the IRS you’re prepared and cooperative.
3. Review your return: Go back and review the tax return that’s being audited. Look for any mistakes or discrepancies that might have triggered the audit. If you find any errors, be prepared to explain them or correct them.
4. Respond by the deadline: The audit letter will give you a deadline to respond. Make sure to meet this deadline to avoid penalties or further action from the IRS.

How to Respond to Different Types of Audits

1. Mail Audit

A mail audit is the most common and simplest type of audit. The IRS will request specific documents to verify parts of your tax return. Here’s how to handle it:

• Send copies, not originals: Never send original documents. Make clear, legible copies of everything the IRS requests.
• Include a clear explanation: Along with your documents, include a letter explaining each item and how it supports your tax return. The easier you make it for the IRS to understand, the smoother the process will be.
• Double-check your response: Ensure you’re sending everything the IRS requested. Missing documents could lead to further delays or issues.

2. Office Audit

For an office audit, you’ll need to bring your documents to an IRS office. Here’s what to do:

• Prepare thoroughly: Organize all requested documents neatly in folders or binders. Bring extra copies of anything that might be relevant, just in case.
• Stay professional and polite: An office audit may feel intimidating, but remain calm and professional during the meeting. The IRS agent is just doing their job, so there’s no need to be confrontational.
• Answer questions directly: Be honest and straightforward when answering questions. Don’t volunteer extra information that the IRS didn’t ask for. Keep your answers short and to the point.

3. Field Audit

In a field audit, the IRS comes to you. This type of audit is more involved, and it’s often used for small businesses or more complex returns. Here’s how to handle it:

• Get professional help: If the IRS is conducting a field audit, it’s a good idea to hire a tax professional or accountant to assist you. They can represent you during the audit and help ensure that everything goes smoothly.
• Be prepared: Make sure all your records are organized and ready for review. The IRS agent will be looking closely at your business or financial situation, so be thorough.
• Keep the audit focused: Try to limit the scope of the audit to the specific issues the IRS raised. Don’t allow the agent to go beyond what’s necessary unless absolutely required.

Hiring a Tax Professional for Help

For many people, handling an IRS audit on their own can be overwhelming. In these cases, hiring a tax professional, such as a CPA or tax attorney, can make the process easier. A professional can:

• Help you organize your records and understand what the IRS is looking for.
• Represent you during meetings with the IRS and handle communication on your behalf.
• Negotiate on your behalf if the IRS proposes any changes or penalties.

While hiring a tax professional will cost money, it can save you time, stress, and potentially lower the taxes or penalties you owe.

How to Avoid Future Audits

After going through an audit, you’ll likely want to avoid it in the future. Here are some simple tips to reduce your chances of being audited:

1. Double-check your return: Always review your tax return for errors before submitting it. Small mistakes can raise red flags.
2. Report all income: Make sure you’re reporting all sources of income, including freelance or gig work. The IRS gets copies of your W-2s and 1099s, so they’ll know if something is missing.
3. Be reasonable with deductions: Don’t claim deductions that seem too large compared to your income. If you’re unsure, consult a tax professional to see if your deductions are appropriate.
4. Keep good records: Save all important tax documents and receipts for at least seven years. This way, if you’re audited, you’ll have the information you need to back up your return.
5. File on time: Filing your tax return late can raise suspicions. Always file by the deadline or request an extension if you need more time.

Conclusion

An IRS audit can seem intimidating, but with the right approach, it doesn’t have to be. By staying organized, responding promptly, and knowing when to seek professional help, you can navigate the process smoothly. Remember, most audits are simple, and with good preparation, you can handle them without too much stress. The key is to stay calm, follow the steps, and keep accurate records to support your tax return.