You need to understand what they’ll investigate and how to justify your decisions.
This article explains audits, how to prepare for them, and how to navigate them. For additional support, explore our best tax relief companies of 2025.
Key Insights on Tax Audits
Audits are not always a sign of wrongdoing. The IRS chooses to audit tax returns for various reasons, including random selections, simple mistakes, or discrepancies in reported income or expenses.
Preparing for an audit is essential. Maintain organized financial records, review tax return information, and understand your rights during an audit.
Seeking professional help from a certified public accountant (CPA) or enrolled agent (EA) can ensure that tax returns are filed correctly and guide you through an audit.
If you disagree with the audit findings, you can appeal the audit results with the IRS.
What are Tax Audits?
A tax audit is an examination of your financial and tax records by the Internal Revenue Service (IRS). The goal is to ensure that tax returns are compliant with tax laws. There are three main types of audits:
1. Correspondence Audit
The most common and least impactful type of audit is when a business receives an IRS letter requesting information to verify its tax return. Correspondence audits are typically caused by simple errors or missing information.
2. Office Audit
This is a more involved audit conducted in person at an IRS office. It typically involves more complex issues than those handled by a correspondence audit and is generally caused by more significant discrepancies in income or expenses.
3. Field Audit
A field audit is the most comprehensive and invasive type of audit. It involves IRS representatives visiting your home or business’s physical location to review financial records and analyze physical assets.
Field audits are typically caused by significant issues like heavily underreported income, overreported expenses, or suspected fraud.
8 Steps to Handle a Tax Audit
Step 1: Receive and Review the Audit Notice
When you receive an audit notice from the IRS, carefully review it to understand the type of audit and its scope. The notice will include information such as the tax year under review, the specific issues being examined, and the deadlines for responding to the notice.
If the IRS is requesting an office visit or a field audit, the notice will include dates for these visits.
Step 2: Gather and Organize Your Documents
Maintaining proper documentation of financial decisions, including tax return choices, is vital for running a business. It’s even more critical during an IRS audit when the auditors will request supporting documentation that validates your financial decision-making.
You should save documents as soon as they are created in an organized physical and/or digital filing system. Information you should store includes:
Proof of income
Proof of expenses
Bank statements
Previous tax returns
Supporting documentation for tax returns
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Step 3: Seek Professional Help
Seeking the help of a CPA or EA can be incredibly helpful when dealing with IRS audits. These professionals can also help ensure that your accounting processes and tax strategies are optimized for accuracy, compliance, and efficiency.
Consider seeking legal representation if the tax audit involves complicated issues, criminal investigations, or complex appeals. Generally, a tax accountant or attorney with extensive experience is the best choice to manage a tax audit.
Step 4: Understand Your Rights as a Taxpayer
The IRS Taxpayer Bills of Rights is a law that ensures fair treatment during an audit, regardless of circumstances. Additionally, knowing what happens if you don't pay taxes can help you understand the importance of addressing audit findings promptly. Taxpayers have the right to:
- Be informed
- Quality service
- Pay no more than the correct amount of tax
- Challenge the IRS's position and be heard
- Appeal an IRS decision in an independent forum
- Finality
- Privacy
- Confidentiality
- Retain representation
- Fair and just tax system
Step 5: Prepare for the Audit
When you receive an audit notice, start by reviewing the audited tax return and any supporting documentation to determine its accuracy. Understand why each amount was used and identify any potential issues with the return.
If you notice a discrepancy or error, prepare an explanation and be ready to fix it. Ensure that your records are organized and readily accessible before the audit begins.
Step 6: Conduct the Audit
- Correspondence audits: Reply to the IRS’s audit notice with your own letter. Craft your response to sound compelling and logical, and provide any requested documents to validate your tax return.
- In-person audits: Remain cooperative at all times. Answer questions truthfully and concisely and provide required documentation promptly, but don’t volunteer information that has not been requested.
Step 7: Respond to the Audit Findings
After the audit, the IRS will provide a report detailing their findings. If you agree with the results, you can sign it and pay any additional taxes owed. If you disagree, you can request a meeting with an IRS manager or file an appeal.
Step 8: Appeal the Audit (If Necessary)
If you choose to appeal the audit because you believe the findings are incorrect, you can file an appeal through the US Office of Appeals.
This process involves presenting your case to an independent appeals officer. Mediation and arbitration may also be available depending on your audit circumstances.
What Common Mistakes Should I Avoid During a Tax Audit?
Awareness of common tax errors can help you avoid future audits. Here are the key mistakes to avoid during a tax audit:
Don't ignore the audit invoice: Doing so could result in penalties or escalation by the IRS.
Don’t provide incomplete records: The IRS will review your records and could escalate the audit if you can't prove your tax return stance.
Don’t volunteer unnecessary information: Ensure all documentation is as relevant and accurate as possible.
Don't handle the audit alone: Unless the issue is very simple, avoid handling the audit by yourself. Professional assistance can protect you and prevent costly errors.
Bottom Line
Tax audits can be stressful, but they are manageable with proper preparation. Start by carefully reviewing the audit notice, gathering your documentation, and considering professional help to navigate the process confidently.
