What Is an IRS Tax Audit and How Does It Work?

An IRS tax audit can be unsettling, even for those who have filed accurately and in good faith. The idea that every deduction, income entry, and supporting document might be scrutinized can create a sense of apprehension and uncertainty, leaving taxpayers unsure of what to expect or how to respond. Audits are not necessarily a sign of wrongdoing; they are part of the IRS’s process to verify that returns are accurate and compliant with tax laws. Still, the implications, from adjustments to an audit tax return to potential penalties, can feel daunting without proper preparation. Understanding how audits are initiated, the types of IRS audits, and the steps involved gives taxpayers a clear framework and greater confidence in navigating the process. Continue reading to learn how IRS audits work, why taxpayers are selected, and what you can do to prepare.

What are Tax Audits?

A tax audit is a formal review conducted by the IRS to ensure that a taxpayer’s filings are accurate and compliant with federal tax laws. Beyond simply verifying reported income, deductions, and credits, audits assess whether financial information aligns with IRS records and accepted tax regulations. Receiving notice of an audit can be unnerving, even for taxpayers who have acted in full compliance, because it triggers scrutiny of the details that typically go unnoticed in routine filing. Many audits are procedural and designed to confirm accuracy rather than imply wrongdoing, but they can uncover errors, omissions, or inconsistencies that require correction or adjustment. By examining returns carefully, the IRS seeks to maintain integrity and fairness in the tax system while also providing a structured process for taxpayers to clarify and substantiate their filings.

How Does an IRS Audit Work?

An IRS audit follows a structured process designed to examine a taxpayer’s return for accuracy and compliance. The steps are methodical, ensuring transparency while allowing taxpayers the opportunity to substantiate their filings.

1. Notification

The IRS initiates the audit by sending a formal notice by mail to the taxpayer. This notice specifies:

• The type of audit being conducted
• The specific areas of the tax return under review
• The documents or information the IRS is requesting

2. Document Submission

Taxpayers respond with the requested records or explanations. This may include: 

• Income statements
• Receipts or invoices for deductions
• Proof of credits claimed

The method of submission depends on the audit type (mail or in-person).

3. Examination

An IRS examiner reviews the submitted materials, comparing them with IRS records and applicable tax laws. The focus is on resolving discrepancies and confirming the accuracy of reported items.

4. Communication of Findings

After the review, the IRS provides an audit report outlining:

• Any adjustments to the tax liability
• Steps for acceptance of the results
• Options for disputing findings if disagreements arise

5. Resolution and Appeals

Taxpayers can:

• Accept the IRS findings and pay any additional taxes owed
• Submit further evidence or clarifications
• Pursue an appeal, including filing a petition with the U.S. Tax Court

Types of IRS Tax Audits

The IRS employs several audit methods, each differing in scope, complexity, and intensity. Understanding these types helps taxpayers anticipate the process and prepare appropriately.

Correspondence Audit

A correspondence audit is the most common IRS audit and is conducted entirely by mail. It targets specific items on a tax return, such as deductions, credits, or income entries, that need verification. Taxpayers are asked to provide supporting documentation or explanations. Correspondence audits are generally less intrusive and focus on isolated issues rather than the entire return. These audits often use two types of letters to communicate requests:

Common IRS Letters 

In correspondence audits, the IRS sends letters requesting specific documentation or clarification. Previously described as “simple letters,” the IRS does not formally use this term. Common notices include CP2000 for underreported income and the 566 series for exam document requests. These letters usually address minor discrepancies and require submission of supporting documents such as receipts, forms, or statements. When responses are complete and accurate, these audits are typically resolved efficiently.

Exam Notices by Mail

More detailed correspondence audits are conducted through written requests covering multiple areas of a tax return. Often part of the Notice 566 series, these notices request broader documentation, including bank statements, invoices, contracts, and other supporting records. The IRS may follow up if additional clarification is needed. In some cases, complex issues may result in the audit transitioning to an office or field examination.

Office Audit

An office audit is conducted in person at a local IRS office with a Tax Compliance Officer. This audit focuses on specific areas of the tax return that require additional documentation beyond what can be submitted by mail. Taxpayers are usually asked to bring original records, such as receipts, invoices, or supporting statements, to clarify or substantiate items reported on their return.

Field Audit

A field audit is the most comprehensive type of IRS examination, conducted in person by a Revenue Agent at the taxpayer’s home, business, or tax preparer’s office. These audits are typically reserved for complex returns or situations where significant discrepancies are suspected. They may cover multiple tax years and require detailed documentation to verify income, deductions, credits, and other financial information.

NRP/TCMP Audits

The IRS historically used the Tax Compliance Measurement Program (TCMP) and now conducts similar intensive audits through the National Research Program (NRP). These audits are statistically designed to evaluate overall taxpayer compliance and identify common reporting errors across the tax system. Unlike other audits, NRP/TCMP audits are not triggered by suspected noncompliance on an individual return. Instead, they are conducted on a random sample of returns to gather data that helps the IRS improve audit selection models, refine enforcement strategies, and inform future compliance policies.

How are Taxpayers Chosen for an IRS Audit?

The IRS employs various methods to select tax returns for audit, aiming to ensure compliance and identify discrepancies. Understanding these methods can help demystify the audit process.

Random Selection

Some audits are initiated through random sampling for compliance measurement (NRP), and others are computer-selected using scoring and document-matching to identify anomalies; selection is not necessarily suspicion-based.

Related Examinations

A taxpayer may be selected for audit due to associations with other returns under review. This includes situations where the taxpayer is linked to business partners, investors, or individuals whose returns are flagged for discrepancies. These related examinations help the IRS ensure consistency and accuracy across connected filings.

How to Prepare for a Tax Audit

Proper preparation is key to managing an IRS audit efficiently and reducing stress. Even accurate filers can benefit from understanding what the IRS expects, how to organize documentation, and when to seek professional support. Preparing thoroughly helps address inquiries, ensures deadlines are met, and minimizes the risk of additional penalties.

Organize Your Records

Maintain clear records of income, deductions, and credits. Relevant documents may include:

• Receipts, invoices, and bank statements
• Payroll and expense records
• Records supporting deductions, credits, and other claims on the tax return

Organizing these materials before the audit allows for quicker responses and helps demonstrate accuracy.

Review Your Tax Return

Go over your submitted return to identify areas that may require explanation. Focus on items with higher scrutiny, such as:

• Business or small business IRS audit items
• Large deductions relative to income
• Unusual or one-off transactions

Understand the IRS Request

Read the audit notice carefully to know what the IRS is asking for. The type of audit, whether correspondence, office, or field, determines the scope and documentation required.

Seek Professional Assistance

Facing an IRS audit can be stressful, and having an experienced professional can help you stay informed and confident throughout the process. An IRS tax audit attorney can provide clarity on what the IRS expects, offer strategic advice, and help you understand potential risks without causing unnecessary worry. Their support is especially valuable for navigating complex issues such as IRS penalties or complications from an unfiled tax return.

Practical ways a tax attorney for IRS audit can assist include:

• Acting as a liaison with IRS examiners to handle communications professionally
• Ensuring all requested documents are complete, organized, and submitted correctly
• Providing detailed explanations of audit outcomes and the implications of any penalties

Stay Calm and Compliant

Respond promptly and accurately to all IRS requests. Avoid providing unnecessary information and always keep copies of submitted documents. Remaining composed and organized ensures that the audit proceeds smoothly and reduces the likelihood of misunderstandings or disputes.

Potential Penalties of an IRS Audit

An IRS audit can lead to various penalties, depending on the nature and severity of the discrepancies found. Understanding these penalties can help taxpayers navigate the audit process more effectively.

Accuracy-Related Penalties

Under Internal Revenue Code (IRC) Section 6662, the IRS may impose a penalty of 20% of the portion of any underpayment attributable to:

• Negligence or disregard of rules or regulations
• Substantial understatement of income tax
• Substantial valuation misstatement
• Overstatement of pension or retirement plan liabilities
• Significant understatements in estate or gift tax valuations
• Transactions lacking economic substance

For gross valuation misstatements or transactions lacking economic substance, the penalty may increase to 40% of the underpayment amount. It’s important to note that the IRS does not “stack” penalties; the highest applicable penalty rate is applied to the underpayment amount.

Civil Fraud Penalty

If the IRS determines that any portion of an underpayment is due to fraud, a penalty of 75% of the underpayment amount may be imposed. This penalty applies only to filed returns and does not apply to any portion of an underpayment that is subject to an accuracy-related penalty.

Failure-to-File and Failure-to-Pay Penalties

• Failure-to-File Penalty:This penalty is typically 5% of the unpaid tax for each month or part of a month that a return is late, up to a maximum of 25%. If the return is more than 60 days late, the minimum penalty is $510 for returns required to be filed in 2025 or 100% of the unpaid tax, whichever is less.
• Failure-to-Pay Penalty: This penalty is generally 0.5% of the unpaid tax for each month or part of a month that the tax remains unpaid, up to a maximum of 25%. If both penalties apply in the same month, the failure-to-file penalty is reduced by the amount of the failure-to-pay penalty for that month, unless the minimum failure-to-file penalty applies.

Interest Charges

Interest accrues on unpaid tax from the return’s due date until payment is made. The IRS determines the rate quarterly, and it compounds daily. For individuals, the rate for overpayments and underpayments will be 7% per year for the calendar quarter beginning Oct. 1, 2025, unchanged from the prior quarter.

Tax Preparer Penalties

Tax preparers can face penalties for understating a taxpayer’s liability due to:

• Unreasonable positions: A penalty of $1,000 or 50% of the income derived from preparing the return, whichever is greater.
• Willful or reckless conduct: A penalty of $5,000 or 75% of the income derived from preparing the return, whichever is greater.

Get Professional Help With IRS Tax Audits at Law Offices of Nick Nemeth

Facing an IRS audit can be stressful, but the right support makes all the difference. At the Law Offices of Nick Nemeth, our experienced IRS tax audit attorneys provide expert guidance tailored to your situation, helping you understand the process, meet deadlines, and present your case clearly. From managing communications with IRS examiners to addressing concerns like IRS penalties or an unfiled tax return, our team ensures you have the clarity and confidence to navigate the audit successfully. Reach out by phone at (972) 426-2944 or submit your details via the contact form to schedule a consultation.

Frequently Asked Questions

How likely am I to be audited?

Audit likelihood depends on factors like income, deductions, and credits claimed. Most taxpayers are not audited, especially those with straightforward returns. High-income filers, self-employed individuals, and returns with unusual deductions are more closely scrutinized.

Does my income affect whether I will be audited? 

Yes. Higher income often attracts more attention from the IRS, as these returns have greater complexity and potential for adjustments. However, even moderate-income taxpayers can be audited if anomalies or errors appear on their returns.

Does the IRS have a statute of limitations for audits?

Yes. Generally, the IRS can audit within three years, extended to six years for substantial omissions (typically more than 25% of gross income); there is no limit for fraudulent returns or nonfilers.

How common are tax audits? 

Tax audits are relatively rare. Only a small percentage of returns are audited each year. Most audits are routine checks focusing on specific items, while complex audits are less common but more comprehensive.

How long does an audit usually take? 

The duration varies by audit type and complexity. Correspondence audits can be resolved in weeks if documentation is straightforward. Office or field audits may take several months, especially if multiple issues or large businesses are involved.

How will I know if I have been selected for a tax audit?

The IRS notifies taxpayers by mail. You will receive an official letter detailing the type of audit and the information required. Never respond to emails or phone calls claiming to be from the IRS without verification.

How can I reduce my chances of being audited?

Filing accurate, complete returns with proper documentation, avoiding unusual deductions, and reporting all income reduces audit risk. Using professional tax preparers and keeping organized records also helps.

What documents do I need for an IRS tax audit?

The IRS may request receipts, bank statements, invoices, forms, and other supporting documentation related to income, deductions, and credits claimed on your return. Organizing these before an audit can speed up the process.

How can I verify that the IRS received my submitted documents or response?

Send documents via certified mail or secure electronic submission if allowed. Keep copies and tracking information. The IRS will usually confirm receipt once the documents are processed.

What are my rights during an IRS audit?

Taxpayers have rights to professional representation, to appeal IRS decisions, and to clear explanations of audit findings. You can consult a tax attorney for IRS audit matters to protect your interests, understand your obligations, and respond accurately to any IRS inquiries.

Where can I get reliable IRS audit help near me in Dallas–Fort Worth?

For expert assistance, you can contact the Law Offices of Nick Nemeth. Our experienced IRS tax audit attorneys help Dallas–Fort Worth residents navigate audits, review tax returns, organise documentation, respond accurately to IRS inquiries, and manage any potential IRS penalties efficiently.

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