How to Prepare for an IRS Audit: 8 Practical Steps
- By the dedicated team of editors and writers at Newsletter Station.
The prospect of an IRS audit can be stressful, but receiving an audit notice does not necessarily mean you made a mistake or that you owe additional taxes. An audit is the IRS's review of your tax return and supporting records to verify that the information reported is accurate.
With proper preparation, organized documentation, and a clear understanding of the process, you can approach an IRS audit with greater confidence. Whether you're an individual taxpayer or a small business owner, these practical steps can help you prepare and avoid unnecessary complications.
Maintain Accurate and Organized Records
One of the most important steps in preparing for an IRS audit is maintaining accurate financial records. Keep documentation supporting your income, expenses, deductions, and credits, including receipts, invoices, bank statements, canceled checks, 1099s, and copies of filed tax returns.
The IRS generally requires taxpayers to retain records supporting items reported on a tax return for at least three years, although certain situations require keeping records longer. For example, different rules can apply when substantial income is omitted, a refund claim is filed, or a return is fraudulent or not filed.
Organize your records by tax year and category so you can quickly locate documents requested by the IRS. Good organization can make the audit process considerably more efficient.
Read the IRS Notice Carefully
Your audit notice should explain why the IRS is contacting you, which tax year is involved, what information is being requested, and how and when you need to respond.
Do not ignore the notice or assume that an audit can be postponed indefinitely. Review every page carefully and make note of all deadlines and instructions. The IRS may conduct an audit by mail or request an in-person or other type of examination, depending on the circumstances.
If anything in the notice is unclear, contact the IRS using the information provided in the notice or consult a qualified tax professional before responding.
Review Your Tax Return Before the Audit
Before communicating with the IRS, carefully review the tax return under examination. Go through the income, deductions, credits, business expenses, and other items identified in the audit notice.
Gather the documentation supporting each item under review. If you discover an error, don't try to hide it. Discuss the situation with your tax professional to determine the appropriate way to address it.
Remember that being selected for an audit does not automatically mean your entire tax return is incorrect. The IRS states that audits may focus on specific items, and the selection does not necessarily indicate a problem.
Consider Working With a Tax Professional
An IRS audit can become complicated, particularly when substantial amounts of money, business records, multiple tax years, or complex deductions are involved. A CPA, enrolled agent, or tax attorney with experience in IRS examinations can help you understand the process and determine how best to respond.
Taxpayers have the right to retain an authorized representative to handle many interactions with the IRS. In most situations, taxpayers who have representation do not have to participate in an IRS interview unless the IRS formally requires them to appear.
Professional assistance can also help you avoid providing incomplete, inconsistent, or unnecessary information.
Provide the Requested Documentation
When the IRS conducts an audit, it will generally request records supporting the income, credits, or deductions being examined. The IRS explains that taxpayers should not normally have to create entirely new records to satisfy an audit request; the requested documents should generally be those used to prepare the tax return.
Provide the information requested and organize it clearly. Avoid sending unrelated documentation simply because it's available. At the same time, don't intentionally withhold relevant information.
Importantly, send copies rather than original documents unless the IRS specifically provides different instructions. Keep a complete copy of everything you submit for your own records.
Respond Promptly and Keep Proof of Delivery
Pay close attention to the response deadline listed on your IRS notice. If you need additional time to gather records or consult a professional, ask about an extension before the deadline rather than simply missing it.
The IRS emphasizes the importance of responding by the date shown on the notice. Failing to respond can result in the IRS completing the audit based on the information available and issuing a report with proposed changes.
When submitting documents, retain confirmation that the IRS received your response. Keeping copies of correspondence, submitted documents, delivery confirmations, and notes from conversations can create a valuable paper trail.
Know Your Taxpayer Rights
Understanding your rights can make an IRS audit feel much less intimidating. The IRS Taxpayer Bill of Rights includes the right to be informed, the right to quality service, the right to pay no more than the correct amount of tax, and the right to challenge the IRS's position and be heard.
Taxpayers also have the right to appeal many IRS decisions, to privacy and confidentiality, to retain representation, and to finality.
If you disagree with the IRS's findings, you generally have options for challenging the proposed changes. Depending on the circumstances, these may include requesting a conference with an IRS manager, pursuing an administrative appeal, or using other available dispute-resolution procedures.
Keep Detailed Records Throughout the Audit
Don't stop documenting your records once the audit begins. Maintain a dedicated file containing the original audit notice, copies of documents you provide, IRS correspondence, notes from conversations, and any agreements or decisions.
If the audit results in an adjustment, carefully review the examination report and understand what changes the IRS is proposing before agreeing to them.
If you disagree with the results, don't assume the decision is final simply because the IRS has proposed changes. The IRS provides procedures for taxpayers who disagree with audit findings, including appeal options in appropriate circumstances.
What Happens After an IRS Audit?
An IRS audit generally concludes in one of three ways: no change, meaning the IRS accepts the items examined; agreed, meaning you accept the proposed changes; or disagreed, meaning you and the IRS do not agree on the proposed adjustments.
If you disagree with an assessment and certain requirements are met, additional options may be available. For example, the IRS has an audit reconsideration process for certain correspondence audits when a taxpayer has new information or disagrees with the assessment and the tax liability remains unpaid.
Stay Organized and Take the Process Seriously
Although an IRS audit can be intimidating, preparation can make the experience much more manageable. Start by carefully reviewing the audit notice, gathering supporting documentation, and organizing your records. Respond by the required deadlines and consider professional assistance if the issues are complicated or you are uncomfortable handling the process yourself.
Most importantly, understand that you have rights when dealing with the IRS. Staying organized, communicating professionally, and keeping thorough documentation can help you navigate the audit process with greater confidence and protect your interests.
