What Is a Tax Audit?
In plain English
A tax audit is an official IRS examination of your tax return to verify the accuracy of reported income, deductions, and credits. The IRS selects returns through random selection, statistical formulas that flag unusual patterns, or mismatches between your return and third-party reports. Audits range from simple correspondence audits resolved by mail to in-person field audits for complex returns.
What Triggers a Tax Audit?
Common audit triggers include unreported income identified through mismatched 1099s and W-2s, unusually large deductions relative to income, a home office deduction, large charitable contribution claims, consistent business losses, high cash-based businesses, and round-number deductions that suggest estimates. High income also increases statistical audit risk. Random selection occurs at any income level.
What Are the Different Types of IRS Audits?
A correspondence audit is the most common — the IRS sends a letter requesting documentation for a specific item. An office audit requires you to bring records to an IRS office. A field audit is the most intensive, with an agent visiting your home or business. Most individual taxpayers who face audits deal only with the correspondence variety, resolvable by sending supporting documents.
How Should You Respond to an IRS Audit?
It's generally recommended not to ignore IRS correspondence — response deadlines are strict, and failure to respond leads to automatic assessments. Reviewing the notice carefully, gathering the specific documents requested, and responding promptly are important steps. For complex audits or large amounts at stake, many people choose to hire a CPA, enrolled agent, or tax attorney for representation. You have the right to appeal any IRS determination.
Frequently asked questions
How long does the IRS have to audit my return?
The standard statute of limitations is three years from the later of the return's due date or filing date. The IRS has six years if you omit more than 25% of gross income, and there is no limit if you file a fraudulent return or fail to file at all.
What should I do if I can't find all my records for an audit?
Reconstruct what you can from bank statements, credit card records, and third-party documents. Contact your employer, financial institutions, or clients for copies of W-2s, 1099s, or payment records. The IRS accepts reasonable reconstruction efforts — document your methodology clearly.
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Related terms
Tax Deduction
A tax deduction reduces your taxable income, lowering the amount of income subject to tax. The actual tax savings depend on your marginal tax bracket.
Itemized Deductions
Itemized deductions let you list specific qualifying expenses to reduce taxable income instead of taking the standard deduction. They benefit taxpayers with large mortgage interest, medical bills, or charitable contributions.
Tax Shelter
A tax shelter is any legal strategy that reduces taxable income, often through investments or business structures that generate deductions or credits. Abusive shelters that exist solely to evade taxes are illegal.
Self-Employment Tax
Self-employment tax covers Social Security and Medicare contributions for self-employed individuals who do not have an employer withholding these taxes. The current combined rate is 15.3%.
IRS Payment Plan
An IRS payment plan allows taxpayers who cannot pay their full tax bill immediately to make monthly installments. Setting one up avoids enforced collection actions like liens and levies.