The IRS Audit Process Explained: What Actually Happens
An IRS audit is simply a review of whether the items on your return are supported, ranging from simple correspondence audits to more intensive office or field audits triggered by factors like a high DIF score. Your best protection is solid documentation and timely responses, and if you disagree with proposed changes you can take the case to Appeals or even Tax Court before paying.
TAX
3/13/20262 min read
The word "audit" terrifies most taxpayers, but the reality is usually less dramatic than people imagine. Understanding how the process actually works can take a lot of the fear out of it.
The IRS conducts three types of audits. The simplest is a correspondence audit, where the IRS sends you a letter asking for documentation to support a specific item on your return, maybe a charitable deduction or a business expense. You respond by mail with the requested documents, and in many cases that's the end of it.
An office audit requires you to appear at an IRS office with your records. These tend to involve more complex issues and multiple items on your return. A field audit is the most intensive, a revenue agent comes to your home or business to examine your books and records on site. Field audits are more common for business returns and high-income individuals.
Regardless of the type, the audit starts because something flagged your return. The IRS uses a scoring system called the Discriminant Information Function, or DIF score, which compares your return against statistical norms. If your deductions are unusually high relative to your income, or if your return has characteristics that historically correlate with underreporting, your DIF score goes up and so do your chances of being selected.
During the audit, the examiner's job is to verify that the items on your return are accurate and supported by documentation. The burden of proof generally falls on you under IRC Section 7491, although it can shift to the IRS in certain circumstances if you've maintained adequate records and cooperated with the examination.
When the audit concludes, the examiner issues a report. If they propose changes, you have the right to agree or disagree. If you disagree, you can request a conference with the IRS Appeals Office, which is an independent function within the IRS designed to resolve disputes without litigation. Most cases settle at Appeals.
If Appeals doesn't resolve it, you have the option of petitioning the United States Tax Court before paying the disputed amount, or paying the tax and filing a refund claim in federal district court or the Court of Federal Claims. Each forum has different advantages depending on the issues involved.
The most important thing during any audit is documentation. If you can substantiate what's on your return, you're in a strong position. If you can't, even legitimate deductions can be disallowed. Keep your records, respond to deadlines, and don't go in without understanding your rights.