How Do IRS Audits Work? Triggers, Process, and FAQ

If you were selected for an IRS audit, don’t panic. This guide explains what an IRS audit is, the common triggers that may lead to one, the different types of audits, and how to prepare if you’re selected. 

Whether you’re facing a simple correspondence audit or a more in-depth review, knowing what to expect can help you navigate the process with confidence.

What is an IRS audit? 

An IRS audit is a review of an individual’s or business’s financial records to verify that tax returns are accurate and comply with tax laws. 

An audit doesn’t always mean there’s a problem—some audits are random, while others are triggered by discrepancies, large deductions, or unusual activity. The IRS may request additional documentation to support reported income, deductions, or credits. 

Audits can be conducted by mail, over the phone, or in person. The taxpayer may owe additional taxes, penalties, or interest if errors are found. However, audits can also confirm that everything was reported correctly.

Common triggers for IRS audits

While the IRS only audits less than 1% of tax returns each year, certain factors can increase the likelihood of being selected. 

Here are some of the most common triggers that may cause an IRS audit:

High-income levels

Taxpayers with higher incomes are more likely to be audited. The IRS audits fewer than 1% of taxpayers earning under $200,000 annually, but the audit rate increases significantly for those earning $500,000 or more. 

For individuals earning $1 million or more, the audit rate is even higher (about 7.2%), as the IRS believes auditing high earners can lead to more tax revenue.

Significant discrepancies between reported income and third-party records

The IRS cross-checks tax returns against W-2s, 1099s, and other third-party reports. If your reported income doesn’t match the records submitted by employers, banks, or clients, it raises a red flag. Even an innocent mistake, like forgetting to report a small 1099 income, can trigger an audit.

Unusual or excessive deductions and credits

While deductions and tax credits are legal ways to lower tax liability, claiming unusually high amounts compared to your income level can attract IRS scrutiny. Some red flags include:

• Large charitable contributions that seem disproportionate to income
• Excessive business expenses, such as meals, travel, and entertainment
• High home office deductions that don’t align with IRS requirements
• Claiming dependents that don’t meet the IRS qualifications

Self-employment income and business deductions

The IRS closely examines self-employed individuals because they have more opportunities to underreport income or inflate deductions. Common triggers include:

• Reporting high business losses for multiple years (this can make your business look like a hobby, which isn’t eligible for deductions)
• Claiming personal expenses as business expenses
• Overstating mileage or travel expenses
• Not issuing 1099s to independent contractors when required

Cash-intensive businesses

Businesses that primarily deal in cash, such as restaurants, bars, salons, laundromats, and vending machine businesses, are at higher risk for audits because cash transactions are harder to track. The IRS pays special attention to whether reported income aligns with industry norms and business expenses.

Round numbers on a tax return

Using too many round numbers (e.g., reporting $5,000 in business expenses or $10,000 in charitable donations) can raise suspicions. The IRS assumes accurate expenses are rarely perfect round figures, so it may indicate estimates rather than actual calculations.

Foreign bank accounts and offshore income

The IRS requires taxpayers to report foreign accounts if the balance exceeds a certain threshold. Failing to disclose foreign assets or improperly reporting offshore income can result in an audit and hefty penalties.

Claiming the Earned Income Tax Credit (EITC) improperly

The EITC is designed for low- to moderate-income earners, but because it’s a refundable credit, the IRS closely scrutinizes claims. Errors in income reporting or dependent qualifications can trigger an audit.

Frequent or large cash transactions

Banks report cash deposits of $10,000 or more to the IRS. If you frequently deposit large amounts of cash just under this threshold, it may raise suspicions of structuring (an attempt to avoid reporting requirements).

While an audit can be stressful, keeping accurate records and filing an honest tax return reduces the risk of problems if the IRS does review your return.

IRS audit process 

If your tax return is selected for an audit, understanding the process can help you confidently navigate it. Here’s a step-by-step breakdown of how an IRS audit typically unfolds:

1. Audit notification

The IRS will notify you of an audit only by mail—never by phone, email, or text. 

The letter will specify which part of your tax return is under review and provide instructions on proceeding. Some audits only require you to mail in additional documentation, while others may involve an in-person interview. Keep reading to learn about the types of audits and what you’ll be expected to do.

2. Review and submit documentation

The IRS will request specific documents, such as receipts, bank statements, W-2s, 1099s, or other records, to verify the accuracy of your return. 

It’s crucial to only submit what is requested and keep copies for your own records. Providing unnecessary documents may expand the scope of the audit.

3. IRS examination and findings

Once the IRS reviews your documents, it will determine whether your tax return is correct. Depending on the complexity of the audit, the process can take weeks or months. The IRS may request further clarification or additional documents.

4. Audit conclusion and response

After reviewing your records, the IRS will issue one of three conclusions:

1. No change: Your records support your tax return, and no adjustments are needed.
2. Agreed change: The IRS proposes adjustments, and you accept them, potentially resulting in additional taxes owed, penalties, or refunds.
3. Disagreed change: You disagree with the IRS’s findings and choose to appeal.

5. Appeal or payment

If you agree with the IRS’s changes, you must pay any additional taxes owed (potentially with penalties and interest). If you disagree, you can appeal the decision through the IRS Office of Appeals or, in rare cases, take your case to tax court.

Staying organized and responding promptly can help minimize complications in an audit. If the process seems overwhelming, consulting a tax professional is wise.

Additionally, if you can’t pay the full amount, it’s possible to work with a tax relief company to help you get a loan to pay off the debt. Check our best tax relief companies page for our top recommendations.

Types of IRS audits

The IRS conducts different types of audits based on the complexity of the case and the level of scrutiny required. There are four main types of audits, each varying in frequency and invasiveness.

Correspondence audit

A correspondence audit is the most common and least invasive type of audit. It is conducted by mail and typically focuses on issues such as missing documents, unreported income, or questionable deductions. 

The IRS will request specific documentation (like W-2s, 1099s, or receipts) to verify parts of the tax return. If the taxpayer provides sufficient proof, the audit is resolved quickly. However, failing to respond or providing insufficient documentation can lead to additional tax liabilities.

Office audit

An office audit is more detailed and requires the taxpayer to meet with an IRS agent at an IRS office. These audits generally focus on more complex issues such as business expenses, rental properties, or unusual deductions. The IRS will provide a list of documents you have to bring to the appointment. 

While less common than correspondence audits, office audits still happen fairly often. They’re more invasive than correspondence audits because they require an in-person review of financial records but are usually limited to specific areas of concern.

Publication 556 provides more information on office audit procedures.

Field audit

A field audit is the most comprehensive and invasive type of audit and also the most rare. In a field audit, an IRS auditor visits the taxpayer’s home, business, or accountant’s office to conduct an in-depth review. 

Field audits typically target high-income individuals, large businesses, or suspected fraud cases. The IRS examines financial records, bank accounts, and business operations to ensure full tax compliance. Because of their scope, field audits take longer and can have serious consequences if discrepancies are found.

Taxpayer Compliance Measurement Program (TCMP) audit

A TCMP audit is a highly detailed and comprehensive IRS audit designed to gather statistical data on taxpayer compliance. Unlike other audits, it is triggered solely by random selection.

Taxpayers must substantiate nearly every line item on their return, making it one of the most exhaustive audits. The IRS uses this data to refine audit selection and enforcement strategies.

Though rare, TCMP audits require extensive documentation, including income, deductions, and credits. They can be time-consuming and burdensome, even for taxpayers with well-organized records.

In the event of a simple correspondence audit where you can easily provide the specific items requested and resolve the matter quickly, it’s possible to handle this on your own. Generally, I recommend consulting a tax professional when facing an audit. Tax professionals can help you provide the specific information or documentation needed and correspond with the IRS on your behalf. Hiring a professional could save you time and stress in the long run. 

How to prepare for an IRS audit

If you receive an IRS audit notice, don’t panic! Staying organized and responding promptly is key. Here’s how to prepare:

• Gather all requested documents: The IRS will specify what they need, such as W-2s, 1099s, receipts, and bank statements. Ensure your records match what was reported on your return.
• Review your tax return: Look for potential discrepancies and understand the areas under review.
• Stay factual and avoid volunteering extra information: Only provide what is requested to avoid expanding the audit’s scope.
• Consult a tax professional if needed: If the audit is complex, hiring a tax professional can ensure proper representation.

Working with a tax relief firm can be beneficial if you’re facing serious tax debt or a high-stakes audit. Anthem Tax Services, for example, specializes in audit representation, helping clients negotiate with the IRS and resolve tax disputes. If you are facing an audit and are unsure where to start, consulting with a firm like Anthem can help you prepare and get through it.

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