What to Expect In An IRS Audit

auditBeing audited by the IRS is a often regarded as a nightmare proliferated by stories, fear, rumors and cases of actual fraud, all of which end up creating a bit of mystique about the process.

The fact is, any taxpayer can be notified of an audit, so it’s important to understand the differences in how IRS audits occur and what each means in terms of responsibilities.


The Desk Audit

This is the lowest level of an IRS audit and probably the most common. In these reviews, the IRS reviews the records provided by a tax payer on a tax return. In most cases,  the IRS finds a math error or miscalculation. The errors tend to be small, under $500, and are often decided with a notice mailed to the tax filer. When you receive one of these notices you have a choice: either agree with the IRS and pay the amount they have determined is due, or appeal the matter. In 99 percent of the cases it’s smarter to just pay the notice and be done with it. It’s a far cheaper path than trying to appeal the issue. Those who do challenge the decision often do so out of ego and don’t realize just paying the desk audit conclusion closes the matter permanently.

A Real Audit

In an actual IRS audit, the taxpayer is summoned to appear at the IRS offices to explain his or her tax return documents. In some cases, an IRS auditor can visit a home or business residence instead. Alternatively, the tax filer can have an attorney or certified tax preparer who worked on the return appear in his name. The process is usually triggered by the IRS finding something in the tax return that doesn’t look right. So the IRS auditor looks at that particular section of the return and expects to see the supporting documentation that backs up the numbers reported on the tax return. These audits can be tricky, however, because they can open up to review the whole tax return. Further, if a tax filer answers the wrong way, the auditor could examine other years’ tax returns as well. The problem with these reviews involves just trying to get the auditor to stop looking at more and more details.

It’s best to review your tax return before appearing and confirm all your documents are in order. If you find a mistake, complete a 1040X amended tax return with the adjustments, and report the taxes due as a result of the changes. This points out the error up front and saves the auditor from spending time looking for it. When the audit is complete, the auditor will have the tax filer or his representative sign an agreement on the changes and findings. The IRS will then send a bill in the mail for the taxes due with penalties and interest added. Alternatively, a tax filer can pay the auditor immediately if at the IRS offices, and close the issue on the spot.

An Investigation

If you are contacted by IRS special agents, this means you are being investigated for a tax crime. You should avoid talking and seek help from a criminal tax defense attorney immediately. An investigation is triggered by the IRS finding something that convinces them a crime has already occurred. Most people destroy their defense just talking to agents trying to show their innocence. A tax filer under investigation needs to defer all questions to a defense attorney experienced in dealing with the IRS.

Audits are no joy, and in most cases a tax filer will end up paying something to close the audit. The challenge is not to avoid the finding, but to minimize the damage and close the audit as quickly as possible.

About the Author

Keith Walters is a tax accountant from Charlotte, North Carolina.  He contributes frequently to Online Accounting Degrees and other web resources about accounting and taxes.