How to Handle an IRS Audit or Investigation

How to Handle an IRS Audit or Investigation

Getting a letter from the IRS saying you’re being audited can be scary. But try to stay calm–with the right preparation, you can get through it. This article will walk you through what to expect and how to handle an IRS audit or investigation.

What is an IRS audit?

An IRS audit is when the IRS reviews your tax return to make sure you reported your income, deductions, and credits correctly. There are a few different kinds of audits¹:
Mail audit – The IRS sends you a letter asking for more documentation on certain items on your return. This is the most common kind.
Office audit – You go to an IRS office and meet with an agent. They’ll ask you questions and review your documentation.
Field audit – An IRS agent comes to your home or business to interview you and review your records. This is the most in-depth type.
The IRS picks returns to audit based on things like inconsistent income reporting, large charitable deductions, etc. But just because you’re audited doesn’t mean you did anything wrong! Lots of audits result in no change to the return.

What to do if you get an audit letter

If a letter comes saying you’re being audited, don’t panic! Here are some tips:
Read it carefully. See what documentation they’re asking for and what parts of your return they have questions on.
Contact a tax pro. Unless you’re very familiar with audits, you’ll want help from a CPA, enrolled agent, or tax attorney².
Gather documents. Pull together everything the IRS is requesting–bank statements, receipts, etc. Organize them neatly so they’re easy to review.
Be responsive. Reply by the deadline in the letter. If you need more time, call the number provided to request an extension. But don’t ignore it!
Tell the truth. Answer all questions from the IRS honestly. Now is not the time to fudge anything.

Handling a mail audit

For mail audits, the key is providing a complete response to the IRS’s requests. Here are some tips:
Make copies of what you send. Keep one for your records in case anything gets lost.
Explain discrepancies. If the IRS questions a deduction or income amount, politely explain why your reporting is accurate.
Include documentation. Highlight key parts of bank statements, receipts, etc that support your tax return numbers.
Follow up. After sending your response, follow up in a few weeks to confirm they received it. Ask if they need anything else.
Get representation. Unless it’s a very minor issue, have your tax pro handle the communications.

Handling an office or field audit

If you have an in-person audit, preparation is key:
Gather documents. The IRS will provide a list of what you should bring–have everything ready in an organized binder.
Review your return. Refresh your memory on your income sources, deductions, credits, etc.
Anticipate questions. Think through what the IRS may ask and how to explain parts of your return.
Dress neatly. You want to look put together and professional.
Bring your tax pro! Having them handle the face-to-face interactions is highly recommended.
During the actual audit:
Be on time. Arrive early–you don’t want to start off on the wrong foot.
Stay calm. The agent isn’t accusing you of anything, just verifying your return.
Answer questions clearly and honestly. Don’t get defensive–just state the facts.
Provide additional docs if requested. The agent may ask for something you didn’t anticipate.
Take good notes. Document everything that was discussed and any follow up needed.

After the audit

Once the audit is complete, here’s what to expect:
No changes. If you provided sufficient documentation, you’ll just get a closure letter and no tax bill.
Small tax bill. You may get a bill for a small amount of additional tax due. Just pay it promptly.
Large tax bill. For more significant changes, you can request an appeal if you disagree with the findings³.
Future audits. Having one audit does not mean you’ll be audited every year. But it can increase your chances somewhat.
The most important things are being organized, responsive, and truthful. Handled properly, an audit doesn’t have to be the nightmare you might imagine. Stay calm, be prepared, and let your tax pro handle the technical details. With a little luck, you’ll be back to your normal life in no time!

References

1. IRS Audits | Internal Revenue Service. (n.d.). Retrieved from https://www.irs.gov/businesses/small-businesses-self-employed/irs-audits ↩
2. How to Handle an IRS Audit & When to Get Expert Help | H&R Block. (2017, June 14). Retrieved from https://www.hrblock.com/tax-center/irs/audits-and-tax-notices/irs-audits/ ↩
3. Dealing with an IRS Audit | Wolters Kluwer. (2021, January 2). Retrieved from https://www.wolterskluwer.com/en/expert-insights/dealing-with-an-irs-audit ↩