Audit

An Audit is an IRS examination of your tax return, financial records, and supporting documentation to verify that information reported is accurate and complies with tax laws. While the word “audit” often causes anxiety, most audits are straightforward reviews addressing specific items rather than comprehensive investigations. Understanding the audit process and your taxpayer rights can help you navigate this situation effectively if selected.

The IRS conducts audits through three primary methods. Correspondence audits are handled entirely by mail, requesting documentation for specific items like charitable contributions or business expenses, and represent the majority of audits. Office audits require you to visit an IRS office to discuss specific issues and provide documentation. Field audits involve an IRS agent visiting your home, business, or accountant’s office for comprehensive examinations, typically reserved for complex returns or business audits.

Audit selection occurs through various methods including computer screening using statistical formulas (Discriminant Information Function), related examinations when your return involves issues connected to another taxpayer’s audit, and random selection for research purposes. Common audit triggers include excessive deductions relative to income, failing to report all income (IRS matches 1099s and W-2s), claiming unusually large charitable deductions, reporting substantial business losses year after year, claiming home office deductions, reporting high meal and entertainment expenses, and math errors or missing information.

During an audit, the IRS examiner reviews documentation supporting items questioned on your return. You have the right to representation by an enrolled agent, CPA, or tax attorney, the right to understand why information is requested, the right to appeal disagreements, and protection against unreasonable examinations. Audit outcomes include no change if everything verifies correctly, agreed changes where you accept proposed adjustments, or disagreement requiring appeals or tax court.

Best practices include responding promptly to audit notices, providing only requested documents (not extra materials), maintaining professional communication, keeping copies of everything submitted, and considering professional representation especially for complex issues. The audit statute of limitations is generally three years from the return filing date, extending to six years for substantial underreporting.