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What Happens If You Get Audited by the IRS

An IRS audit is an examination of your tax return to verify that your reported income, deductions, and credits are accurate. While audits are relatively rare — the IRS audited about 0.4% of individual returns in recent years — understanding the process helps you respond confidently and protect your positions.

Types of IRS Audits

The IRS conducts three types of audits, each with different levels of scrutiny:

  • Correspondence audit: The most common type. The IRS sends a letter requesting documentation for specific items on your return. You respond by mail with supporting documents. Most correspondence audits focus on a single issue — such as a charitable deduction or education credit.
  • Office audit: The IRS asks you to visit a local IRS office to review specific items in person. These are more detailed than correspondence audits but still limited in scope.
  • Field audit: An IRS revenue agent visits your home, business, or accountant's office to conduct a comprehensive examination. Field audits are rare and typically involve complex returns, high-income filers, or business operations.

How Does the IRS Select Returns for Audit?

The IRS uses several methods to identify returns for examination:

  • DIF scoring: The Discriminant Information Function assigns a numeric score to each return based on statistical norms. Returns that deviate significantly from expected patterns receive higher scores and may be selected for review.
  • Information matching: The IRS compares the income reported on your return against W-2s, 1099s, and other information returns filed by payers. Discrepancies automatically trigger notices.
  • Related examinations: If a business partner, investor, or related party is under audit, your return may be examined as part of that investigation.
  • Random selection: A small number of returns are selected randomly through the National Research Program.

Common Audit Triggers

While no specific item guarantees an audit, certain patterns draw IRS attention:

  • Large Schedule C losses relative to other income, especially for multiple consecutive years
  • Home office deductions claimed without meeting the exclusive and regular use test
  • High charitable deductions relative to income (particularly non-cash contributions)
  • Unreported income identified through 1099 or W-2 matching
  • Large business meal and entertainment deductions without adequate documentation
  • Earned Income Tax Credit (EITC) claims, which the IRS examines at higher rates

Your Rights During an Audit

The Taxpayer Bill of Rights (IRC §7803(a)(3)) guarantees specific protections during an audit:

  • Right to be informed: The IRS must explain what they need and why
  • Right to professional representation: You can authorize an enrolled agent, CPA, or attorney to represent you (Form 2848)
  • Right to appeal: If you disagree with the audit findings, you can appeal within the IRS before going to Tax Court
  • Right to finality: The IRS generally has three years from the date you filed to audit your return (IRC §6501(a)), extended to six years if gross income is understated by more than 25%
  • Right to a fair process: The IRS must follow established procedures and treat you professionally

How to Respond to an Audit Notice

If you receive an audit notice (typically IRS Letter 566 or 525), follow these steps:

  1. Read the notice carefully. It specifies which items the IRS is questioning and what documentation they need.
  2. Gather your records. Collect receipts, bank statements, invoices, and any other documentation supporting the positions on your return.
  3. Organize by line item. Match each document to the specific line on your return that the IRS is questioning.
  4. Respond by the deadline. The notice gives you a response date — typically 30 days. Request an extension if you need more time.
  5. Consider professional help. For office or field audits, professional representation can significantly improve your outcome.

Possible Audit Outcomes

  • No change: The IRS accepts your return as filed. Approximately 10-15% of audits result in no change.
  • Agreed: The IRS proposes changes and you agree. You sign a form accepting the additional tax, interest, and any penalties.
  • Disagreed: You dispute the findings and can request a conference with an IRS manager, file a formal appeal, or petition the U.S. Tax Court within 90 days of a statutory notice of deficiency.

How to Build an Audit-Ready Return

The best audit defense starts before you file. Keep contemporaneous records, retain supporting documents for at least three years after filing (seven years for records related to bad debt or worthless securities), and understand the legal basis for each position on your return. A return that cites specific IRS authority for every calculation gives you — and any representative — a clear starting point for responding to IRS questions.

How CirclesTax Prepares You for Audits

CirclesTax generates an Audit Defense Report with every return. This report lists every tax position, the dollar amount, and the specific IRS legal authority — IRC section, Revenue Procedure, or IRS Publication — that supports it. Each position is rated by risk level (conservative, moderate, or aggressive). If the IRS questions a deduction or credit, you have the exact legal citation and documentation chain ready to share.