An audit is a review of your tax return to verify that the income, deductions, and credits you reported are accurate. The IRS selects returns using computerized scoring systems and document-matching programs, then notifies you by mail with a letter explaining what’s being examined and what records you need to provide. Most audits are handled entirely through the mail, and many end with no changes to your return at all.
How the IRS Selects Returns
The IRS doesn’t pick returns at random. It uses two main tools to flag returns that are likely to have errors or unreported income.
The first is the Discriminant Inventory Function, or DIF score. This is a formula that scores every return based on how likely it is to produce a tax change if examined. A high DIF score means the numbers on your return deviate from statistical norms for returns with similar income and filing characteristics. The IRS also uses a separate Unreported Income DIF score designed specifically to identify returns with a high probability of income that wasn’t reported.
The second tool is the Information Returns Program, which cross-checks what you reported against documents filed by employers, banks, brokerages, and other third parties. If your return shows $45,000 in wages but your employer’s W-2 reports $52,000, that mismatch will get flagged. The same applies to 1099 forms for freelance income, interest, dividends, and investment sales. IRS classifiers (the people who review flagged returns) rely heavily on these document mismatches when deciding whether to open an examination.
Certain line items draw more scrutiny than others. Large charitable deductions relative to your income, claims for the earned income credit, education credits, and discrepancies in stock cost basis are common triggers. Self-employment income reported on Schedule C also gets extra attention because it involves both income reporting and business expense deductions that are harder for the IRS to verify independently.
Three Types of IRS Audits
Not all audits look the same. The type you get depends on how complex the issues are and how much money is potentially at stake.
Correspondence Audit
This is the most common type. The IRS sends you a letter asking you to mail in documentation for one or two specific items on your return. You might be asked to substantiate a charitable donation, verify your eligibility for a tax credit, or provide records showing the cost basis of stock you sold. You never meet with anyone in person. You gather the requested documents, send them back, and wait for a response. These audits focus on narrow, straightforward issues.
Office Audit
For more complex situations, the IRS may ask you (or a representative you authorize, such as an enrolled agent or CPA) to appear at a local IRS office with your records. Office audits typically involve small business returns, rental real estate income, or income flowing through partnerships or S corporations. The examiner will review your documents in person and may ask questions about how you calculated specific figures.
Field Audit
This is the most intensive type. An IRS revenue agent comes to your home, place of business, or your representative’s office to conduct the examination. Field audits are reserved for businesses, high-net-worth individuals, complex transactions, and cases where the potential tax adjustment is large. The agent may spend multiple days reviewing records, interviewing you, and examining your operations firsthand.
What Happens During the Audit
Regardless of type, every audit follows the same basic sequence.
It starts with a letter. The IRS will never initiate an audit by phone. The letter identifies which tax year is being examined, which items on your return are in question, and what specific documents you need to provide. It also includes contact information for the examiner handling your case and instructions for responding.
Your job at this stage is to gather the records the IRS requested. That might mean pulling bank statements, receipts, canceled checks, mileage logs, or contracts. The IRS provides a written list of exactly what it wants. You don’t need to hand over your entire financial life, just the items specified in the letter.
For correspondence audits, you mail or upload the documents and wait. For office and field audits, you bring the records to your appointment and the examiner reviews them with you, asking questions as needed. The examiner is comparing what you claimed on your return against what the underlying records actually show.
The length of an audit varies widely. A simple correspondence audit over a single deduction might wrap up in a few weeks after you send your documents. A field audit of a business can stretch over several months.
Three Ways an Audit Can End
Every audit concludes in one of three ways:
- No change: The IRS reviewed your records and found that everything you reported was accurate. Your return stays as filed and you owe nothing additional.
- Agreed: The IRS proposes changes to your return, and you understand and accept them. You sign the examination report, and any additional tax, interest, or penalties are calculated based on the adjusted figures.
- Disagreed: The IRS proposes changes, but you believe they’re wrong. This opens up a series of options for challenging the findings.
If you agree with the proposed changes, you sign the report and either pay the balance or set up a payment arrangement. Interest accrues from the original due date of the return, not from the date the audit concludes, so the sooner you resolve things the less interest accumulates.
Your Options If You Disagree
You have several layers of recourse if you believe the IRS got it wrong, and you don’t need to go to court to use most of them.
The first step is informal. You can contact the examiner identified in your letter and discuss the disputed items directly. If that doesn’t resolve things, you can ask to speak with the examiner’s supervisor. Many disagreements get settled at this stage, especially when the issue comes down to a document the examiner hasn’t seen yet or a misunderstanding about how a deduction was calculated.
If you’re still at an impasse, you can request Fast Track Settlement. In this process, a specially trained Appeals employee acts as a neutral mediator between you and the examiner. Your case stays with the original examiner while the mediator works to facilitate an agreement. It’s faster than a formal appeal and doesn’t require you to give up any rights.
The next option is filing an administrative appeal. If the total amount of additional tax and penalties for the period in question is $25,000 or less, you can make a small case request, which is a simplified process. If the proposed change exceeds $25,000, you need to file a formal written protest laying out the facts, the law you’re relying on, and why you believe the IRS position is incorrect.
If you can’t reach a settlement through the appeals process, you can take your case to court. The U.S. Tax Court is the most common choice because it lets you dispute the tax before paying it. You typically have 90 days from the date the IRS mails its final notice of deficiency to file a petition (150 days if the notice is sent to an address outside the United States). You can also sue for a refund in U.S. District Court or the U.S. Court of Federal Claims, but those routes require you to pay the disputed amount first and then seek to get it back.
What Records to Keep and for How Long
The single best thing you can do to prepare for a potential audit is keep organized records. The IRS generally has three years from the date you filed your return to initiate an audit, though that extends to six years if the IRS suspects you underreported income by more than 25%, and there’s no time limit for fraudulent returns or returns that were never filed.
At a minimum, hold onto W-2s, 1099s, bank and brokerage statements, receipts for deductions you claimed, records of estimated tax payments, and closing documents for any real estate transactions. For business owners, that also means profit-and-loss statements, expense receipts, asset purchase records, and payroll documentation. Digital copies are fine as long as they’re legible and organized in a way that lets you find what you need quickly.
If the IRS asks for a document you don’t have, that’s not automatically a disaster, but it does shift the burden to you to prove the deduction or credit through other means. Having clean records from the start turns most audits into a paperwork exercise rather than a stressful negotiation.