An audit letter is stressful, but it is also routine. Most audits are narrow, focused on specific items, and many close with no change or with modest adjustments. How you respond in the first few weeks shapes the whole process.
What an audit is, and why you were selected
The IRS describes an audit as a review of an organization's or individual's books and records to confirm that the tax return is correct under tax law. Selection does not always mean a problem. The IRS says returns may be picked by a statistical formula that compares them to norms, or because they involve a related taxpayer whose return was audited. A refund alone does not trigger an audit.
How the IRS contacts you
The IRS says it notifies taxpayers by mail and does not initiate an audit by telephone. If someone calls claiming to start an audit and demanding payment, treat it as a scam. Real audit letters list the tax year, the items under review, the documents requested, and a response deadline.
The three audit types
- Mail audit: the IRS asks for information about specific items such as income, expenses, or deductions.
- Office audit: you or your representative meet an examiner at an IRS office.
- Field audit: the examiner visits your business, home, or your representative's office. If you have too many records to mail, you can request an in-person audit.
What records you need
The IRS sends a written list of the documents it wants. The IRS says you must keep the records used to prepare your return for at least three years from the filing date. For a business, the practical list usually includes:
- Bank and credit card statements for the year.
- Sales records, invoices, and payment processor reports.
- Receipts and invoices for expenses under review.
- Mileage logs, vehicle records, and home office support where claimed.
- Payroll reports, Forms W-2, 941, and 1099s.
- Contracts, loan documents, and asset purchase records.
- Workpapers that tie your books to the return.
How to respond
- 1Read the letter and mark the response deadline.
- 2Get delivery confirmation for anything you send. The IRS recommends it.
- 3For a mail audit, you can usually get a one-time automatic 30-day extension by faxing or mailing a written request, according to the IRS. For an in-person audit, contact your assigned auditor or their manager.
- 4Respond only to what is asked. Provide organized copies, not originals.
- 5If you miss the deadline, the IRS completes the audit without your input and sends a report with proposed changes.
- 6Consider authorizing a representative with Form 2848 before you talk to the examiner.
How far back audits go
The IRS says it generally audits returns filed within the last three years, and sometimes goes back further for substantial errors, usually no more than six years. You are not required to agree to extend the statute of limitations, but the IRS notes that if you refuse, the auditor will decide based on the information already provided. Discuss that decision with a professional before answering.
Your rights
- Courteous treatment, privacy, and confidentiality.
- An explanation of why information is requested.
- Representation by yourself or an authorized representative.
- The right to appeal within the IRS and in the courts.
How audits end
- No change: you substantiated everything reviewed.
- Agreed: you accept the proposed changes and sign the examination report, and payment options are available if you owe.
- Disagreed: you can request a conference with an IRS manager, use mediation, or file an appeal if enough time remains on the statute of limitations.
Common mistakes
- Ignoring the letter or missing the deadline.
- Sending a box of unorganized records.
- Volunteering information not asked for.
- Guessing at answers instead of checking the records.
- Reconstructing records after the fact without saying so.
- Meeting the examiner alone when the issues are complex.
Prevent the next audit problem
Good bookkeeping is the best audit defense. See bookkeeping cleanup services and how to prepare your books for tax preparation. For cost questions about hiring help, read IRS audit representation cost.
If the audit involves large items, multiple years, or unreported income, talk to a CPA, enrolled agent, or tax attorney before responding. They have unlimited rights to represent you before the IRS.
Our IRS resolution service supports business owners through correspondence audits and notices. To get help with your business tax situation, send us the letter and the tax years involved. No result can be promised.
