IRS Audits: What to Expect and How to Prepare

Receiving an IRS audit notice can be stressful, but understanding the process and knowing how to prepare can significantly reduce anxiety and ensure a smoother experience. Let's walk through what happens during an audit and how to effectively prepare.

Understanding IRS Audits

An IRS audit is a review of your tax return to verify that information is accurate and complete. Most audits aren't signs of wrongdoing—they're often triggered by statistical formulas, random selection, or discrepancies in your return.

Types of IRS Audits

1. Correspondence Audit

The most common type, conducted entirely through mail. The IRS requests additional documentation to support specific items on your return. These typically involve simple issues like missing forms or clarification on deductions.

2. Office Audit

You're asked to visit an IRS office to review your return with an auditor. These are more comprehensive than correspondence audits and usually focus on specific issues or deductions.

3. Field Audit

The most comprehensive type, conducted at your home, business, or accountant's office. Field audits are typically reserved for complex returns or when substantial issues are identified.

Common Audit Triggers

• Unusually high deductions relative to income
• Home office deductions
• Large charitable contributions
• Business losses year after year
• Math errors or missing information
• Significant cash transactions
• Claiming 100% business use of a vehicle
• Discrepancies between your return and third-party reports (W-2s, 1099s)

How to Prepare for an Audit

1. Review the Notice Carefully

Read the audit notice thoroughly to understand exactly what the IRS is questioning. Note all deadlines and required documentation. Don't ignore the notice—failure to respond can result in additional penalties.

2. Gather Documentation

Collect all supporting documents for the items being audited:

• Receipts and invoices
• Bank statements and canceled checks
• Credit card statements
• Mileage logs
• Employment records
• Previous years' tax returns

3. Organize Your Records

Present your documentation in a clear, organized manner. Create a summary sheet linking each deduction to its supporting documentation. This demonstrates professionalism and makes the auditor's job easier, potentially leading to a faster resolution.

4. Consider Professional Representation

You have the right to be represented by a CPA, tax attorney, or enrolled agent. Professional representation is especially valuable for complex audits or if you're uncomfortable dealing directly with the IRS.

During the Audit

Best Practices

• Be professional and courteous
• Answer questions directly but don't volunteer extra information
• Provide only the documentation requested
• Take notes during meetings
• If you don't understand something, ask for clarification
• Don't be afraid to say "I don't know"—you can provide information later

Possible Outcomes

An audit can result in three outcomes:

• No Change: Your return is accepted as filed
• Agreed: You agree with the IRS findings and proposed changes
• Disagreed: You disagree with the findings and can appeal

Prevention is Key

The best way to handle an audit is to prevent one through:

• Accurate, complete tax returns
• Proper documentation of all deductions
• Reasonable expense claims relative to income
• Timely filing and payment
• Professional tax preparation