Don’t Panic: A Practical Guide to Your IRS Audit Experience

When the IRS Comes Knocking: What Actually Happens

The question what happens if the IRS audits you strikes fear in many taxpayers, but an IRS audit isn’t an accusation. It’s simply a review to verify the accuracy of your reported income, expenses, and credits.

Here’s what you need to know right away:

1. You’ll receive notification by mail only – The IRS never initiates an audit by phone or email.
2. Three types of audits exist – Correspondence (by mail), Office (at an IRS office), or Field (at your home/business).
3. You have rights – Including the right to representation, privacy, and appeal.
4. Most audits result in no change or minor adjustments – Criminal charges are extremely rare.
5. You typically have time to respond – Usually 30 days from the notice date.
6. The IRS generally looks back 3 years – Though they can go back 6 years for substantial errors.

The good news? Audits are rare. Of over 160 million individual returns filed in 2021, the IRS audited only 0.4%. Being selected doesn’t mean you’ll owe more; some audits result in refunds or no change at all.

Successfully navigating an audit requires understanding the process, knowing your rights, and responding appropriately. Preparation and professional guidance can make the difference between a stressful ordeal and a manageable process.

As Attorney Samuel Landis, Managing Partner at Segal, Cohen & Landis, I’ve used my 15+ years of experience to help hundreds of clients steer IRS audits. I know that proper preparation and expert representation can transform an overwhelming ordeal into a manageable process.

Understanding the IRS Audit: Why Me and What Kind?

Receiving an audit notice naturally leads to the question, “Why me?” An IRS audit—officially an examination—isn’t an accusation of wrongdoing. It’s a verification process to ensure tax laws are followed, sometimes even resulting in a refund. The IRS selects returns for several reasons, and understanding them helps clarify what happens if the IRS audits you.

Computer screening is the most common method. The IRS’s Discriminant Function System (DIF score) compares your return to norms for similar taxpayers. Unusual items can flag your return for review. A separate Unreported Income DIF (UIDIF) score looks for potential unreported income.

Random selection also occurs. Like jury duty, some returns are chosen by chance through programs like the National Research Program. This helps the IRS update its data and ensure fairness.

Related examinations happen when a business partner or another entity you have transactions with is audited. The IRS might review your return to ensure consistency across related financial dealings.

Information matching is another major trigger. The IRS matches income on your return with third-party data (W-2s, 1099s). Discrepancies often lead to an audit.

For a deeper understanding of what an audit entails and how the process works, you can visit our page on what is an audit.

The Three Main Types of IRS Audits

Not all audits are the same. The IRS conducts them in three ways, each with a different level of intensity.

Correspondence audits, the most common type, are handled entirely by mail. You’ll receive a letter about a specific issue and respond with the requested documents.

Office audits are more in-depth, requiring you to bring records to an IRS office for an in-person meeting with an auditor to discuss multiple items on your return.

Field audits are the most comprehensive. An IRS agent visits your home or business for an extensive review of your records. These are typically for complex returns or businesses.

How Long Does an Audit Take?

The duration of an audit varies based on its complexity, your cooperation, and whether you agree with the findings. However, the IRS operates under a statute of limitations.

Generally, the IRS has a three-year statute of limitations to audit a return from its filing date. However, this extends to six years for substantial errors, such as omitting over 25% of your gross income.

For cases of suspected tax fraud or if you never filed a return, there is no statute of limitations. The IRS can go back as far as they deem necessary.

Most audits focus on the last two years. The timeline depends on the case’s complexity and your responsiveness. Promptly providing organized records, especially with professional help, can expedite the process.

To learn more about audit timelines and how far back the IRS can reach, visit our comprehensive guide on are you at risk of an IRS audit and how far back can the IRS go.

The Audit Begins: Notification, Rights, and Initial Steps

Receiving an IRS audit letter is stressful, but understanding the first steps can turn anxiety into action. This is the first moment in understanding what happens if the IRS audits you.

Crucially, the IRS only initiates an audit by mail. Any contact by phone, email, or social media claiming to be an initial audit notice is a scam.

Verifying a Legitimate Notice

A real audit letter will include the agent’s name and contact information. If you’re unsure, call the main IRS number at 1-800-829-1040 to verify the notice is legitimate before responding. The IRS audit FAQ page is also a helpful resource.

What to Do First

Once confirmed, don’t ignore the notice. Read it carefully to understand which tax year, issues, and documents are involved, and note the response deadline. Begin gathering all related records immediately. Even for simple audits, consulting a tax professional is a wise move.

Your Fundamental Taxpayer Rights

You have legally guaranteed protections under the Taxpayer’s Bill of Rights. We recommend reading IRS Publication 1 (Taxpayer’s Bill of Rights). Key rights include:

• The right to professional and courteous service.
• The right to privacy and confidentiality of your tax information.
• The right to know why the IRS is asking for information and how they will use it.
• The right to representation by an attorney, CPA, or Enrolled Agent. You can hire a representative at any time, and they can handle the audit on your behalf.
• The right to appeal any decision you disagree with.

What happens if the IRS audits you and you don’t respond?

Ignoring an audit notice is the worst thing you can do. The problem will not go away. If you don’t respond, the IRS will make a decision without your input, which will not be in your favor. They will disallow the items in question, assess additional tax, and you will lose your right to appeal.

You will also face accuracy-related penalties (20-40% of the underpayment) plus interest that compounds daily from the original tax due date.

After a final determination, the IRS will begin collection actions, which can include tax liens, bank account levies, and wage garnishment.

Even if you are overwhelmed or don’t have your documents, you must respond. Request an extension or inform them you are seeking professional help. Any communication is better than silence. At Segal, Cohen & Landis, we know that recovering from silence is always harder than addressing the audit properly from the start.

What Happens If the IRS Audits You: A Preparation Guide

Once you understand what happens if the IRS audits you, the next crucial step is preparing your response. The better prepared you are, the smoother the process will be.

Gathering Required Documentation

The audit notice is your roadmap, detailing the tax year, specific items, and documents the IRS needs. A key principle is to provide only what they ask for. Volunteering extra information can expand the audit’s scope. Typical documents include bank statements, receipts, business records (profit and loss statements), and proof of income (W-2s, 1099s). Presenting these records in an organized manner shows professionalism and can speed up the process.

For a comprehensive walkthrough of the entire audit defense process, including detailed preparation strategies, Read our complete IRS Audit Defense Guide.

What if I Don’t Have Receipts?

Missing receipts isn’t a dead end. You can often reconstruct your records using alternative proof like bank and credit card statements, canceled checks, or email correspondence. For business expenses, vendor invoices or online confirmations work.

The Cohan Rule, a legal principle, may allow you to estimate expenses if you can prove they were incurred and provide a reasonable basis for the amount. However, never falsify documents. The penalties for tax fraud are severe, including criminal charges. It is far better to be honest about missing records and attempt to reconstruct them.

When to Hire a Professional Representative

Some taxpayers handle simple correspondence audits alone, but professional representation is crucial in many situations. Consider hiring a tax professional if:

• The audit is complex or involves significant money. Business transactions, rental properties, or large potential tax bills warrant an expert’s eye.
• You disagree with the auditor. A professional can present legal arguments and negotiate on your behalf.
• You feel overwhelmed or lack the time. A representative acts as a buffer, handles all communication, and ensures deadlines are met, protecting your rights throughout the process.

The IRS provides helpful information about choosing a tax professional on their website. For taxpayers with limited income, Low Income Taxpayer Clinics (LITCs) may offer free or low-cost representation for qualifying individuals.

At Segal, Cohen & Landis, our team of attorneys, CPAs, and Enrolled Agents has over 33 years of experience helping more than 25,000 clients with IRS audits and other IRS Tax Problems. When you hire us, you typically don’t have to speak to the auditor yourself—we handle everything.

After the Audit: Outcomes, Penalties, and Next Steps

Understanding what happens if the IRS audits you after the examination is crucial for navigating the final stages. After the review, the auditor issues an examination report with their findings, leading to one of three outcomes:

• No change: The IRS accepts your return as filed. The audit is over.
• Agreed change: The IRS proposes adjustments, and you agree. You’ll sign an agreement and arrange to pay any tax owed or receive a refund.
• Disagreed change: You don’t agree with the proposed adjustments. You have the right to appeal the decision.

Penalties, Interest, and Criminal Charges

If an audit results in more tax owed, you’ll likely face penalties and interest. Common penalties include:

• Accuracy-related penalties: 20% to 40% of the underpaid tax for negligence or substantial understatement.
• Failure to file penalty: 5% of the unpaid tax per month (up to 25%).
• Failure to pay penalty: 0.5% of the unpaid tax per month (up to 25%).

Interest also accrues on any underpayment and can rarely be waived. If you believe penalties were unfairly assessed, you may be able to request IRS Penalty Abatement.

It’s vital to distinguish between honest mistakes and tax fraud. Fraud involves a willful attempt to evade tax and is a felony with severe consequences, including prison time. While most audits are civil matters, an auditor who finds evidence of fraud can refer the case to the IRS Criminal Investigation Division. If you have any concern that your audit could become a criminal matter, seek legal counsel immediately.

What happens if the IRS audits you and you owe money?

If the audit concludes you owe money, the IRS offers several payment options:

• Pay in full: The simplest option to stop interest and penalties from growing. You can pay online via IRS Direct Pay.
• Installment agreement: Allows you to make monthly payments over time. You can apply for a payment plan online.
• Offer in Compromise (OIC): Allows qualifying taxpayers with significant financial hardship to settle their tax debt for less than the full amount owed.

Ignoring the bill leads to serious collection actions, including liens on your property, levies on your bank accounts, and wage garnishment. Proactive communication is key to avoiding these measures.

How to Appeal an IRS Audit Decision

If you disagree with the audit findings, you have the right to appeal. The process generally follows these steps:

1. Request a manager conference: An informal first step to resolve disagreements with the auditor’s supervisor.
2. Appeal to the IRS Independent Office of Appeals: If the manager conference fails, you can file a formal appeal. This office is separate from the audit division. For disputes of $25,000 or less, you can use a simplified small case request. For larger amounts, a formal written protest is required.
3. Go to court: If you don’t reach an agreement with Appeals, you can petition the U.S. Tax Court (usually without paying the disputed tax first). Alternatively, you can pay the tax and sue for a refund in U.S. District Court or the U.S. Court of Federal Claims.

Navigating appeals is complex and often requires professional representation. We provide detailed guidance on What to do when you disagree with an IRS audit and can help you steer IRS Appeals with confidence.

Conclusion

Understanding what happens if the IRS audits you reveals it’s a manageable process, not a nightmare. An audit is simply a review to verify your tax information. The key to a successful outcome is built on a few principles:

• Preparation is everything. Organized records are your best defense.
• Your rights matter. The Taxpayer Bill of Rights protects you throughout the process.
• Never ignore the IRS. A timely response is crucial to avoid automatic penalties and collection actions.
• Professional guidance is invaluable. An experienced tax professional can act as your advocate and buffer, especially in complex cases.

Outcomes vary, from no change to owing additional tax. If you owe, payment options are available. If you disagree, you have robust appeal rights.

At Segal, Cohen & Landis, we’ve spent over 33 years helping more than 25,000 clients steer these situations. As Attorney Samuel Landis often tells clients: “An IRS audit is a challenge, not a catastrophe.” With the right preparation and guidance, you can face an audit with confidence rather than fear.

Don’t face the IRS alone. Contact us for expert IRS Audit Representation and let our three decades of experience work for you.