So you're being audited now what?

Imagine… you open your mailbox and between the junk mail and a thank-you card from your cousin, there it is… a windowed envelope from the IRS. Yes, the IRS still uses snail mail (no calls or email). What’s inside? A notice that one of your recent tax returns is about to go through the audit wringer.

Shock sets in and your mind is flooded with questions. Why is this happening to me? I paid all my taxes, right? What is the IRS looking for? What did I mess up? Should I call my CPA (hint: yes, you should)? Do I still have all the receipts, statements and other things the IRS will want to see? But the biggest question: how long is this going to take and how much will it cost me?

This may sound like an unlikely scenario, but it really isn’t. In the 2022 fiscal year, the IRS audited over 700,000 tax returns! While not all audits are the nightmare people expect them to be (sometimes you even get money back), it’s safe to say that most would prefer not to receive that ominous IRS notice. So, what do you do to prepare? Knowledge is power and it’s important to understand how the IRS conducts audits and how you can make the best of a potentially less-than-fun experience, should it come your way.

What can we learn from past IRS Audits?

Every year, the IRS publishes a Data Book. From this document, we can learn some key facts, including how many audits are conducted, the number of audits by tax entity (individuals, businesses, etc.), audit volume by income (individuals) or asset (businesses) levels, and even how much the IRS ultimately recovered from audits (i.e. additional taxes, interest and penalties collected).

Here's some interesting figures from the most recent Data Book:

Closed Examinations...

- Individual Returns:

- Business Returns*:

Examinations Resulting in Additional Tax:

Additional $$ Collected from Examinations (in thousands):

Examinations resulting in a refund:

Refund Amounts to Taxpayers (in thousands):
‍*Includes C-Corps, S-Corps and Partnerships.

708,309

625,975

18,622

14,770

$30,166,132

17,225

$5,315,227

A Quick Note on the IRS Data Book

‍Before we dive deeper, it’s essential to distinguish between the number of returns examined for a given year and the number of actual audits (examinations) conducted. Sometimes, a tax return filed in one year might not be audited until later, so the numbers don’t always line up with the year you’d expect. And here’s something missing from those figures: how many audits the IRS is juggling at any given time.

Why am I getting audited?

The reasons behind an IRS audit can be a bit of a mystery. The IRS might flag certain issues, or they might simply choose you at random. In many cases, it’s tough to pinpoint the exact cause, but checking your tax records and consulting with a tax professional can help uncover any compliance issues before you connect with the IRS

What should I expect from the audit?

Most IRS audits follow a somewhat predictable pattern, whether they’re “desk audits” or “field audits.” For desk audits, an IRS agent will mainly communicate through mail or fax (yes, the IRS still uses fax machines). You probably won’t even meet an agent in person. Their goal is to reach a resolution with as little direct interaction as possible. Field audits, on the other hand, often involve more face-to-face (or in today’s world, virtual) interaction with taxpayers. They’re more common for businesses and higher-income individuals and typically delve into more complex issues.

Whether it’s a desk or field audit, the steps are quite straightforward. First, the IRS agent asks for information, usually in the form of an Information Document Request (IDR). If they need more details about specific items, they’ll ask for those too. If there’s a dispute, you might need to have a meeting (or a call) to discuss the matter directly with the agent. Finally, the agent will give their verdict, either a “no change” or a “notice of proposed adjustment,” which could result in a lower or higher tax bill. If you disagree with the agent’s findings, you have the right to appeal with the IRS.

How long will the audit take?

The timing of an audit is hard to guess since the IRS doesn’t release any statistics on this. But here’s a general rule: field audits take longer than desk audits, and the more complex the audit, with more money at stake, the longer it can drag on. However, being proactive and well-prepared might speed things up and lead to a quicker resolution.

Should I get a CPA or Tax Professional to help?

While you can tackle an audit on your own, we strongly recommend working with a Certified Public Accountant (CPA) or tax professional. Even though the IRS is expected to treat you fairly, an audit isn’t the best scenario for on-the-job training. If you had a tax professional prepare your return, reach out to them to see if they can represent you. If you did it yourself, you’ll probably want to find representation. Yes, there’s a cost associated with getting a tax pro involved, but their expertise could resolve the audit faster with less disruption and maybe even save you some extra money.

What else can I do to be prepared?

Beyond making sure your returns are accurate and truthful, you can keep an eye on your IRS transcripts to see if an audit might be lurking. TaxNow’s proactive alerts can detect potential audit triggers up to six months in advance! If you spot an IRS flag but haven’t received an audit letter yet, you and your CPA can get a head start on the issue, potentially resolving it well ahead of time.

Audits are nobody’s idea of a good time, but with TaxNow’s proactive alerts, you can have plenty of time to get both mentally and logistically ready. This can help you navigate the process more smoothly and get back to the business of living your life.