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Ultimate Guide to IRS Audits
You got a letter from the IRS. Your stomach dropped. Now you need to know what you’re dealing with, what’s going to happen, and whether you need help.
This guide covers everything: what an audit actually is, how likely you are to face one, what triggers IRS scrutiny, how the process works, and when it makes sense to handle it yourself versus bringing in a professional.
What Is an IRS Audit?
An IRS audit is a review of your tax return to verify you reported income, deductions, and credits correctly. The IRS officially calls it an “examination.”
Most audits aren’t what you see in movies—an agent at your door with a badge and a briefcase. The majority happen entirely by mail. You get a letter asking for documents, you send them in, and the IRS either accepts your return or proposes changes.
The IRS can audit returns within three years of filing. This extends to six years if you underreported income by more than 25%. There’s no time limit if you filed a fraudulent return or didn’t file at all.
Not every IRS letter is an audit. The IRS sends millions of notices annually for math errors, missing information, and balance due reminders. Many people first encounter IRS scrutiny through automated matching—computers comparing what you reported against W-2s and 1099s the IRS received from employers and banks. These notices aren’t technically audits, but they can escalate if you don’t respond correctly.
Being audited doesn’t mean you did something wrong. Many audits end with no changes. Some result in refunds.
How Common Are IRS Audits?
Rare. The overall audit rate is about 0.4%—roughly 1 in 250 returns.
But averages hide the real story. Your actual risk depends on your income, the complexity of your return, and what you’re claiming.
IRS Examination Activity (FY 2024)
|
Metric |
Value |
|
Total audits closed |
505,514 |
|
Additional tax recommended |
$29.0 billion |
|
Correspondence audits (by mail) |
77.9% |
|
Field audits (in-person) |
22.1% |
|
Automated Underreporter cases |
1.15 million |
Two things stand out in this data:
Field audits punch above their weight. They’re only 22% of audits but generated $23 billion of the $29 billion in additional tax. The IRS saves in-person audits for returns where the money justifies the effort.
Computers catch more than auditors. The Automated Underreporter program—which matches W-2s and 1099s against your return—closed 1.15 million cases. That’s more than double the number of traditional audits.
Audit Rates by Income
|
Income Level |
Audit Rate |
Risk Level |
|
Under $25,000 |
0.4% |
Low (EITC claims get extra scrutiny) |
|
$25,000 – $100,000 |
0.1–0.2% |
Very low |
|
$100,000 – $500,000 |
0.1% |
Very low |
|
$500,000 – $1 million |
0.6% |
Moderate |
|
$1 million – $5 million |
1.1% |
Elevated |
|
$5 million – $10 million |
3.1% |
High |
|
$10 million+ |
4.0% |
High |
The pattern is clear: audit risk climbs with income. But even at $10 million+, 96% of returns aren’t audited in any given year.
The exception is EITC claimants, who face a 0.7% audit rate despite lower incomes. These are mostly correspondence audits checking eligibility documentation—easy for the IRS to run at scale.
Types of IRS Audits
Correspondence Audit
The IRS sends a letter asking for documents to support specific items on your return. You mail back your response. No face-to-face meeting.
What they examine: Usually one or two issues—unreported income, charitable contributions, a specific credit or deduction.
Timeline: 3-6 months.
78% of all audits are correspondence audits. If you’re going to be audited, this is most likely what it looks like.
Office Audit
You’re scheduled for an in-person meeting at an IRS office. You bring documentation, the examiner reviews it and asks questions.
What they examine: Multiple issues—itemized deductions, small business income (Schedule C), rental properties (Schedule E), dependency questions.
Timeline: 3-6 months. The meeting itself usually takes a few hours.
Field Audit
An IRS revenue agent comes to you—your home, your business, or your representative’s office. They spend one or more days going through your records.
What they examine: Complex returns, significant business activity, high income, situations where the IRS suspects material underreporting.
Timeline: 6-12 months or longer.
Field audits are serious. They’re reserved for returns where the IRS believes there’s significant money at stake. If you’re facing a field audit, professional representation is strongly recommended.
Why Returns Get Selected
The IRS doesn’t pick returns randomly. They use several methods to identify returns worth examining.
Information Matching
The IRS receives billions of W-2s, 1099s, and K-1s every year. Computers automatically match this information against what you reported.
If your employer reported paying you $55,000 but you reported $50,000, the computer flags it. If you received a 1099-INT for $500 in interest but didn’t report it, the computer flags it.
This is the most common way taxpayers encounter IRS scrutiny. It’s efficient, automated, and catches a lot of discrepancies.
Statistical Scoring (DIF)
The IRS compares your return against statistical norms for taxpayers with similar characteristics. Returns that deviate significantly—unusually high deductions relative to income, for example—get higher scores and are more likely to be selected.
The exact formula is secret, but the principle is simple: if your return looks unusual compared to your peers, it gets a closer look.
Compliance Campaigns
The IRS runs targeted campaigns on specific issues: cryptocurrency, conservation easements, offshore accounts, large partnerships. If your return involves a current campaign focus, your audit risk goes up regardless of other factors.
Related Examinations
If you’re connected to an entity under audit—a partnership, an S corporation, a business transaction—your return may get pulled in as part of that examination.
Common Audit Triggers
Certain return characteristics increase audit risk. This doesn’t mean you shouldn’t claim legitimate deductions—it means you need solid documentation.
Unreported Income
The single most common trigger. When what you report doesn’t match what the IRS received from third parties, you’ll hear from them. This includes W-2 wages, 1099 income, K-1 income from partnerships, stock sales, gambling winnings, and retirement distributions.
What you need: Copies of all information returns. Reconcile your return against these documents before filing.
Large Deductions Relative to Income
If you earn $75,000 and claim $30,000 in itemized deductions, your return looks different from most people in your bracket. The DIF score flags outliers.
Large deductions aren’t wrong—undocumented large deductions are problems.
What you need: Receipts, bank statements, acknowledgment letters, appraisals. If you can’t prove it, you may lose it.
Schedule C Business Income
Self-employed individuals face higher scrutiny. Schedule C returns have high rates of noncompliance—both underreported income and overstated expenses.
Red flags include: large expenses relative to income, repeated losses year after year, home office deductions, 100% business use vehicle claims, and significant travel and entertainment expenses.
What you need: Clean books. Bank statements reconciled to reported income. Receipts for expenses. Mileage logs. Documentation of business purpose.
Repeated Business Losses
If your business loses money every year, the IRS questions whether you have a profit motive or are just deducting a hobby. Under hobby loss rules, you can only deduct hobby expenses against hobby income.
What you need: Evidence of profit motive—business plans, marketing efforts, time invested, changes made to improve profitability.
EITC Claims
The Earned Income Tax Credit has high error rates, often due to confusion about qualifying child rules, residency requirements, and income limits.
What you need: Documentation of the child’s relationship to you, proof they lived with you more than half the year (school records, medical records, lease agreements), and documentation of your income.
Large Charitable Contributions
Big donations relative to income, non-cash donations (especially vehicles, art, real estate), and donations without proper documentation all attract attention.
What you need: Written acknowledgment from the charity for any donation over $250. Form 8283 for non-cash donations over $500. Qualified appraisal for non-cash donations over $5,000.
Cash-Intensive Businesses
Restaurants, bars, retail stores, laundromats—businesses handling significant cash face extra scrutiny because cash is easier to underreport.
The IRS may use indirect methods to verify income: bank deposit analysis, markup analysis comparing your numbers to industry standards, or lifestyle analysis comparing spending to reported income.
What you need: Detailed records of cash receipts. Point-of-sale reports. Daily register tapes. Bank deposits documented and explained.
Foreign Accounts and Income
International tax compliance is a major IRS priority. Foreign bank accounts, foreign income, and foreign assets carry elevated audit risk and severe penalties for noncompliance.
What you need: Records of all foreign accounts and assets. Proper FBAR filings (FinCEN 114). Form 8938 if required. Documentation of foreign income.
The Audit Process: Step by Step
Step 1: You Get a Letter
Every audit starts with a letter—never a phone call. If someone calls claiming to be from the IRS and demanding immediate payment, it’s a scam.
The letter tells you:
Read it carefully. The letter defines the audit’s initial scope.
Step 2: Gather Your Documentation
Collect everything requested—but organize it properly. Don’t throw papers in an envelope.
Structure your response:
Step 3: Respond to What Was Asked—Nothing More
This is critical. Answer exactly what they asked. Don’t volunteer information about issues that aren’t part of the audit.
Audits expand. The examiner asks about one thing, notices something else in your documents, and suddenly you’re defending items that weren’t originally under review.
Protect yourself by staying focused on the specific questions asked.
Step 4: Expect Follow-Up
Most audits involve at least one round of follow-up questions. Treat each request as a new deadline requiring the same careful approach.
For In-Person Audits
If you have an office or field audit:
Audit Outcomes
Every audit ends one of three ways:
No Change
The IRS accepts your return as filed. You get a closing letter. Keep it with your records.
About 10-15% of audits end this way.
Agreed
The IRS proposes changes and you agree—either because they found legitimate errors or because you can’t adequately document a position. You sign an agreement, the IRS assesses the additional tax (plus interest and any penalties), and you pay or set up a payment plan.
Unagreed
You disagree with the IRS findings. You have options:
Request a manager conference. Sometimes a fresh perspective resolves the dispute.
Request IRS Appeals. The Appeals Office is independent from the examination function. Appeals officers can settle cases based on litigation risk—the chance the IRS might lose in court. Many disputes resolve at Appeals without going to court.
Receive a Notice of Deficiency. If Appeals doesn’t resolve it (or you skip Appeals), the IRS issues a “90-day letter” giving you 90 days to petition Tax Court.
Petition Tax Court. Tax Court is the only forum where you can dispute the IRS’s determination before paying. In District Court or the Court of Federal Claims, you pay first and sue for a refund.
Audits Can Result in Refunds
Not every audit means you owe money. In FY 2024, about 14,000 examinations resulted in refunds totaling $8.3 billion. This happens when the IRS identifies credits you didn’t claim or errors that caused you to overpay.
When to Handle It Yourself vs. Get Help
You Can Probably Handle It Yourself If:
Get Professional Help If:
Self-representation is where taxpayers make expensive mistakes: volunteering information that expands the audit, missing deadlines, presenting disorganized documentation, making damaging statements, or failing to assert their rights.
The cost of qualified representation is almost always less than the cost of a mistake.
Types of Tax Representatives
Certified Public Accountants (CPAs) are state-licensed and can represent you before the IRS. Many specialize in tax.
Enrolled Agents (EAs) are federally licensed tax specialists. They’ve either passed a comprehensive IRS exam or worked at the IRS. Tax is all they do.
Tax Attorneys are lawyers specializing in tax law. They can represent you before the IRS and in court. Attorney-client privilege may protect communications in ways that don’t apply to other representatives.
For most audits, any qualified professional can help. For complex matters, potential litigation, or anything involving possible criminal liability, a tax attorney is typically the right choice.
Need Help With an IRS Audit?
If you’ve received an audit notice and aren’t sure what to do next, we can help you understand your options.
The Tax Defenders has resolved IRS audits for thousands of clients since 2002. We know how the IRS works, we know how to protect your rights, and we know how to get the best possible outcome.
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Call (312) 345-5440 for a free consultation.
