Types of IRS Audits

Few things cause more worry than an audit letter from the IRS. Before considering how you should respond, most people worry first about the financial implications. You do not have to navigate the process alone; a tax law attorney can explain what to expect and guide your preparation.

The IRS audit is one of the tools the federal government uses to make sure individuals and businesses are meeting their tax obligations, evaluating income and earnings to determine whether a return is accurate.

Why returns get audited

Chosen by the IRS computer network

The IRS computer system uses an algorithm designed to recognize statistical probabilities that a return contains inaccurate information. It can flag returns where the expense-to-income ratio suggests unreported income, or where the return does not match information from other sources, such as W-2s or 1099s.

Audits of related businesses

If a business you are associated with is being audited, you might be next. Audits investigate transactions, which can involve other taxpayers such as partners or investors, and it is common for the IRS to open related audits to confirm all payments were properly reported.

Errors or discrepancies

Errors in data entry or math look no different to the IRS than intentional fraud. A return that does not match your other financial documents can raise a red flag, and a simple explanation is not always enough to make the audit go away.

The four types of IRS audit

Your audit notice explains which type you can expect and how to proceed.

Correspondence audit

The most common and simplest type, generally involving a letter requesting additional documentation to substantiate an expense or deduction. Different letters signal different levels of concern; a 566 letter typically requests more documentation, while a CP2000 notice is sent when the IRS believes the information on your return does not match its own records.

Office audit

When an agent's questions are too complex for back-and-forth correspondence, you may instead be asked to appear at a government office. This is more detailed than a correspondence audit but less intrusive than a field audit, and the questions can be narrow or cover a wide range of issues. You can also bring documents that support what you reported.

Field audit

The most comprehensive type: a revenue agent comes to your home or business to review records in person. Agents are experienced at combing through documentation and commonly ask for more once they arrive. They use interviews to look for evidence of fraud and may examine your lifestyle and business activity closely, making this the most intrusive of the four options.

National Research Program audit

The rarest type comes from the IRS's National Research Program, which examines a random sample of returns each year. It is less about a specific issue on your return and more about measuring compliance: the results help update the Discriminant Function scores the IRS uses to choose other returns for audit. It is comprehensive, and you may be asked to support every line of the return.

What to expect during the process

Once selected, the IRS contacts you by mail with instructions for how to respond, and the process from there depends on the type of audit. In every case, you provide documents and answer the agent's questions.

Notification

You are notified by mail that your account was selected, with instructions on the required documents and how the audit will proceed. You can dispute the notice by following its instructions and providing supporting documents, or respond with the requested action if you agree. Either way, the letter sets a due date.

Providing documents

For a correspondence audit, you send the requested documents by mail, and you can request confirmation that the IRS received them.

Attending an audit

Office and field audits require you to attend a meeting where you provide information and answer questions, and professional representation is recommended for these more involved audits. Whatever type of audit you face, you have the right to be represented. The IRS sets the date, time and place of an in-person audit. It will work with you or your representative on the timing, and it considers written requests to change the place. See preparing for an audit for the practical steps.