Seeing "Internal Revenue Service" on an envelope is enough to raise anyone's heart rate. But an audit notice is not an accusation — it's a request for information or clarification. Most audits are resolved without drama if you respond correctly.
Types of IRS Audits
Correspondence audit (most common) The IRS sends a letter requesting documentation for a specific item on your return — a deduction, a credit, or income you reported. You respond by mail with supporting documents. These are the most common and least invasive.
Office audit You're asked to bring documents to a local IRS office to discuss specific items. Less common than correspondence audits.
Field audit An IRS agent comes to your home or business. Reserved for complex returns with significant issues. Rare for most individual filers.
Why Returns Get Selected for Audit
The IRS uses a combination of factors:
- Automated checks that flag statistical outliers
- Missing income that doesn't match third-party reporting (W-2s, 1099s)
- Unusually high deductions relative to income
- Math errors
- Participation in certain tax shelters or transactions
- Random selection
An audit does not necessarily mean you made an error. Many audits simply confirm that you claimed something correctly.
What to Do When You Receive an Audit Notice
1. Read the letter carefully. Identify exactly what the IRS is questioning. The notice will specify the tax year, the issue, and the response deadline.
2. Don't ignore it. Ignoring an audit notice will not make it go away. The IRS will assume the information in the original notice is correct, assess additional taxes, and begin collection.
3. Gather your documentation. Find the specific receipts, statements, or records that support whatever the IRS is questioning. Focus only on the items they asked about — you don't need to respond with your entire financial history.
4. Respond by the deadline. If you need more time, call the number on the notice and request an extension. The IRS generally grants reasonable extension requests.
5. Consider professional representation. For anything more complex than a simple correspondence audit, a tax professional can represent you before the IRS, handle communications, and ensure you're not offering more information than required.
What If the IRS is Right?
If the audit shows you owe additional taxes, you can pay, request a payment plan, or negotiate a settlement in some cases. Penalties can sometimes be reduced or waived if you have a reasonable cause for the error and a clean compliance history.
What If You Disagree?
You have the right to appeal. If you disagree with the IRS findings, you can request an IRS Appeals conference. If still unresolved, you can take the case to Tax Court.
Prevention Going Forward
- Keep records for at least 3 years after filing (7 years if you underreported income by more than 25%)
- Ensure all 1099 income is reported — the IRS sees it too
- Document deductions at the time of the expense, not at filing time
- File on time or request an extension
Dealing with an audit notice? Contact Financial Ace and we'll help you understand your options and respond correctly.