The IRS is Calling: A No-Nonsense Guide to Your Tax Return Audit

Why Understanding an Audit Tax Return Matters for Your Financial Security

An audit tax return is an examination by the IRS or a state tax authority to verify your tax return’s accuracy. While an audit notice can be stressful, understanding the process is the first step toward resolving it. Here are the key facts:

Key Facts About Tax Audits:

• What it is: A review of your tax return and supporting documents to ensure accuracy
• Who conducts it: The IRS (federal) or your state’s Department of Revenue (state)
• Notification: You’ll receive a letter by mail—never by phone or email initially
• Common triggers: High income, large deductions, unreported income, math errors, or random selection
• Types: Mail audit (simplest), office audit (in-person at IRS), or field audit (at your home/business)
• Timeline: The IRS typically can audit returns filed within the last three years
• Outcomes: No change, you agree and pay/receive refund, or you disagree and appeal

Being selected for an audit does not automatically mean you’ve done something wrong. The IRS accepts most returns as filed. Audit rates are generally low but increase significantly with income.

The process can take weeks or months, and interest and penalties can accrue on any unpaid balance. However, you have rights, including the right to professional representation and the right to appeal any findings. Understanding the process and your rights is key to a manageable resolution.

As Attorney Samuel Landis, I have over 15 years of experience resolving complex IRS controversies. My focus is on protecting taxpayers’ rights and achieving favorable outcomes in audit tax return examinations, using innovative settlement techniques to help clients steer the process with confidence.

What is a Tax Audit and Why is My Return Being Examined?

An audit tax return is a review by the IRS or a state agency to verify that the numbers you reported are accurate and comply with tax laws. While receiving an audit notice is stressful, it doesn’t automatically mean you did something wrong; sometimes, it’s just a request for verification. The IRS uses a sophisticated computer system to flag returns that differ from statistical norms. Common triggers include:

If you want to dive deeper into how federal audits work, the IRS has helpful resources on their website. More information on IRS audits.

Why Audits Happen

• Unreported income: The IRS matches W-2s and 1099s against your return. Mismatches raise a flag.
• High income: Higher-income returns are more complex and face greater scrutiny.
• Large deductions: Deductions that are unusually large compared to your income can trigger a review.
• Consistent business losses: The IRS wants to ensure your business is a for-profit venture, not a hobby used for write-offs.
• Mathematical errors: Simple mistakes can prompt a second look.

Understanding the Selection Process

The IRS primarily uses a computer program called the Discriminant Index Function (DIF) System to score returns based on statistical norms. A high score means your return is different enough to warrant a human review. Other selection methods include random selection through the National Research Program and related examinations, where your return is pulled because of a connection to another audited taxpayer or business.

Here’s what I want you to remember: being selected for an audit tax return examination doesn’t mean the IRS thinks you’re a tax cheat. It’s often just a matter of verifying information.

At Segal, Cohen & Landis, we have over three decades of experience guiding clients through this process. We understand how unsettling an audit can be and know that with the right approach, most are resolved smoothly.

Federal vs. State Audits: Understanding the Key Differences

It’s crucial to know who is conducting your audit tax return examination. The IRS audits your federal return (Form 1040) based on the Internal Revenue Code. Your state’s Department of Revenue (like California’s Franchise Tax Board) audits your state return based on state-specific laws, which can differ significantly from federal rules.

Here’s how federal and state audits typically compare:

Can a State Audit Trigger a Federal Audit (and Vice Versa)?

The short answer is yes, sometimes. Federal and state tax agencies have information sharing agreements. If one agency finds a significant issue like unreported income, they will likely notify the other. However, many audits are independent. A state audit over a residency dispute, for example, might not trigger federal scrutiny if it doesn’t affect your federal return.

Specific Triggers for State Audits

State audits often focus on issues that don’t exist at the federal level:

• Residency Issues: States like California are aggressive in auditing individuals who claim to live in a no-tax state but maintain significant ties to California.
• Multi-State Business Operations (Nexus): States audit businesses to ensure they are paying taxes in every state where they have a sufficient presence (nexus), such as an office, employees, or significant sales.
• State-Specific Credits: Claiming large state-specific tax credits or deductions often invites verification from state auditors.

The Anatomy of an Audit Tax Return: Process, Timelines, and Outcomes

The IRS always initiates an audit tax return by mail—never by phone or email. If you’re unsure a letter is legitimate, verify it on the IRS website. How to confirm a letter’s legitimacy. The IRS generally has a three-year statute of limitations to audit a return from its filing date. This extends to six years if you underreported your gross income by more than 25%. For fraud or failure to file, there is no time limit. An audit’s duration varies from weeks to over a year, depending on its complexity.

The Three Main Types of Audits

Your audit will fall into one of three categories:

• Mail Audit (Correspondence Audit): The most common type. The IRS requests documentation for specific items via mail. You respond by mailing or faxing copies of your records.
• Office Audit: An in-person meeting at an IRS office to review your records with an examiner. These are more detailed than mail audits, and professional representation is recommended.
• Field Audit: The most comprehensive audit. An IRS agent visits your home or business for an in-depth review of your financial records. This type is reserved for complex cases, and professional representation is essential.

Possible Outcomes of Your Audit Tax Return

Once the examination is complete, there are several possible outcomes:

• No Change: Your return is accepted as filed.
• Agreed: You agree with the auditor’s proposed changes and sign an examination report. You will then pay any additional tax or receive a refund.
• Disagreed: You do not accept the findings and can challenge them through the appeals process.
• Additional Tax, Penalties, and Interest: If the audit finds you underpaid, you will owe the tax difference plus penalties and interest, which accrues from the original filing date.
• Tax Refund: In some cases, an audit may find you overpaid and are due a refund.

Can an Audit Lead to Criminal Charges?

It’s extremely rare. The vast majority of audits are civil matters resolving honest mistakes or disagreements over complex laws. Criminal charges are reserved for cases of intentional tax fraud—a willful and deliberate attempt to evade taxes. If an auditor suspects fraud, they may refer the case to the IRS Criminal Investigation (CI) division. This is a serious development that requires an immediate consultation with an experienced tax attorney. Are you at risk for tax fraud?.

Your Game Plan: How to Prepare for and Respond to an Audit

Receiving an audit notice is unsettling, but a clear plan helps. Follow these steps:

• Don’t Ignore It: The worst thing you can do is ignore the notice. The IRS will simply make an assessment in your absence, which is rarely favorable. Respond by the deadline.
• Gather Your Documents: The audit letter specifies what the IRS needs. Collect all relevant receipts, bank statements, and records. Organize them logically.
• Provide Only What’s Requested: Cooperate fully, but do not volunteer extra information or documents. This can unnecessarily expand the scope of the audit. Always send copies, never originals.
• Seek Professional Representation: While you can represent yourself, a tax attorney, CPA, or Enrolled Agent can handle communications, protect your rights, and steer complex issues. For office or field audits, representation is essential. At Segal, Cohen & Landis, our tax attorneys provide a crucial legal perspective, especially when penalties or legal issues are a concern.

Know Your Rights as a Taxpayer

As a taxpayer, you are guaranteed certain rights during an audit tax return examination. These include the right to professional and courteous treatment, privacy, and confidentiality. Crucially, you have the right to representation (to have a professional act on your behalf) and the right to appeal any IRS decision you disagree with. For a full list, see the IRS’s Publication 1, “Your Rights as a Taxpayer.” Read the IRS’s “Your Rights as a Taxpayer”.

What to Do if You Disagree with the Findings

If you disagree with the audit’s findings, you have several options to challenge the result:

1. Request a conference with the auditor’s manager for an informal review.
2. Use IRS mediation programs like Fast Track Settlement to reach an agreement with a neutral party.
3. File a formal appeal with the independent IRS Office of Appeals, which exists to resolve tax disputes without litigation.
4. As a final step, petition the U.S. Tax Court, a federal court independent of the IRS. This is a serious legal proceeding that requires a tax attorney.

Navigating these appeals requires strategy and expertise. What to do when you disagree with an IRS audit.

Frequently Asked Questions about Tax Return Audits

We’ve spent years helping clients steer the audit tax return process, and we’ve noticed that certain questions come up again and again. Let’s address the most common concerns we hear in our practice.

What are the most common “red flags” for an audit?

While no single item guarantees an audit, certain things make a review more likely as they stand out to IRS computer systems:

• High Income: Returns with higher incomes are statistically more likely to be audited due to their complexity.
• Large Deductions: Claiming deductions, like charitable donations, that are unusually large compared to your income.
• 100% Business Use of a Vehicle: This is rare in practice and often scrutinized.
• Consistent Business Losses: Reporting losses for multiple years may trigger a review to determine if the activity is a business or a hobby.
• Income Mismatches: This is a major trigger. The IRS computers match 1099 and W-2 forms against your return, and any discrepancy is flagged.

How far back can the IRS audit my returns?

The IRS generally has three years from the date you file to audit your return. This window extends to six years if you have substantially underreported your income (by more than 25%). In cases of tax fraud or failure to file, there is no statute of limitations. We recommend keeping all tax records for at least seven years.

Who is qualified to represent me during an audit?

You can represent yourself, but for anything beyond a simple mail audit, professional help is wise. Three types of professionals are authorized to represent you before the IRS:

• Tax Attorneys: Offer legal advice, attorney-client privilege, and can represent you in Tax Court. Our firm, Segal, Cohen & Landis, specializes in this comprehensive representation.
• Certified Public Accountants (CPAs): Accounting experts who are excellent at organizing and defending financial records.
• Enrolled Agents (EAs): Tax specialists licensed by the federal government who focus exclusively on tax matters.

Choose a representative with specific experience in tax controversy and audit representation.

Conclusion: When to Call for Professional Backup

An audit tax return is a serious matter, but it is manageable. By understanding the process, knowing your rights, and preparing properly, you can steer the examination effectively. While some simple mail audits can be handled alone, professional help is crucial in many situations.

You should call a tax attorney if:

• The amount of tax and penalties at stake is substantial.
• The audit involves a business, complex investments, or multi-state issues.
• There is any risk of being accused of tax fraud.
• You want the peace of mind that comes from having an expert shield you from the process.

At Segal, Cohen & Landis, we have helped more than 25,000 clients resolve federal and state tax issues for over 33 years. Our tax attorneys know the law and how to protect your interests. We serve clients in Los Angeles, throughout California, and nationwide.

You don’t have to face an audit alone. Get expert IRS audit representation and let us handle the complexity while you get back to your life.