15 Things Taxpayers Should Know About an IRS Examination (Audit)
If the IRS flags your return, take a breath. An audit is simply the IRS asking you to verify the numbers you filed. Below are 15 practical things every taxpayer should know—what it is, why it happens, and how to navigate it with confidence.
1. An audit checks accuracy, not character
An examination compares what you reported to the law and to information the IRS already has (W-2s, 1099s, K-1s, broker reports). It’s not an accusation; it’s a request for proof that your return is correct.
2. There are three audit formats
• Correspondence (by mail): targeted document requests on specific items.
• Office (at an IRS office): interview + document review.
• Field (at your home/business/representative’s office): the most in-depth.
The first contact is by mail, never by phone or text.
3. Not every “change notice” is an audit
A CP2000 (underreporter) notice is an automated matching letter proposing changes—often because a 1099 or brokerage form didn’t match your return. It’s not a full audit, but it does require a timely response with documents or corrections.
4. Why returns get selected
High mismatch risk, unusually large deductions relative to income, cash-heavy businesses, complex transactions (real estate, crypto, stock sales), or purely random selection. Good records are your defense—no matter why the return was chosen.
5. Deadlines control your options
IRS letters have strict response dates. If you disagree with proposed changes, you may receive a 30-day letter (appeal rights), and later a 90-day Notice of Deficiency (to petition Tax Court). Missed deadlines shrink your options dramatically—calendar them.
6. You have rights (use them)
The Taxpayer Bill of Rights includes: the right to be informed, to quality service, to pay no more than the correct tax, to challenge the IRS and be heard, to appeal, to representation, and to finality. Don’t hesitate to exercise these.
7. You can appoint a representative
If you don’t want to speak directly with the IRS, authorize a pro (EA/CPA/attorney) with Form 2848 (Power of Attorney). For many taxpayers, having a buffer lowers stress and improves outcomes.
8. Keep the scope tight
Exams often start with a few issues (e.g., mileage, home office, stock basis). Answer exactly what’s asked, completely and clearly—no more, no less. When the IRS needs something, they issue an Information Document Request (IDR); respond to that IDR specifically.
9. Documentation wins cases
For expenses, the gold standard is: what, how much, when, to whom, and why (business purpose). Save receipts, invoices, bank/credit statements, mileage logs, calendars, and written agreements. If records are incomplete, some items can be reconstructed (e.g., from bank data), but contemporaneous logs are best.
10. Business vs. personal expenses
Deductions must be ordinary and necessary for your trade. Mixed-use items (phone, internet, vehicle) need reasonable allocation.
• Auto: Either standard mileage (requires a mileage log) or actual expenses (gas, repairs, insurance, depreciation).
• Home office: Regular and exclusive use for business; choose simplified or actual-expense method.
11. Income matching & deposits matter
Expect questions where IRS data shows income you didn’t report (1099-NEC/MISC/K, brokerage 1099-B). For small businesses, an examiner may compare bank deposits to reported income; be ready to explain non-income deposits (transfers, loans).
12. Basis and depreciation are common trip-ups
Stock sales: report cost basis so only gain is taxed. Rentals: track depreciation and improvements; know that selling property can trigger depreciation recapture. S-corp shareholders must track stock and loan basis to deduct losses correctly.
13. Credits are heavily scrutinized
Earned Income Credit, Child Tax Credit, education credits, and adoption/energy credits have specific documentation rules. Keep proof of residency, school bills, Form 1098-T, adoption records, or equipment invoices and certifications for energy credits.
14. Agree or disagree—know the paths
If you agree, you’ll sign the report and can pay or set up a plan. If you disagree, you can:
• Provide more documentation/rebuttal;
• Request a meeting with an examiner’s manager;
• Go to IRS Appeals (often via the 30-day letter);
• If a Notice of Deficiency is issued, petition Tax Court within 90 days.
If you missed your chance earlier or found new proof later, ask about Audit Reconsideration.
15. Penalties, interest, and prevention
Accuracy-related penalties (often 20%) can apply if there’s negligence or substantial understatement. You may qualify for First-Time Abatement or Reasonable Cause relief. Interest runs until paid. The best prevention: a simple bookkeeping rhythm, quarterly estimate/W-4 tune-ups, and a yearly planning review.
How RDA Tax Services helps (and reduces stress)
• We control the process: handle the letters, manage deadlines, and speak for you.
• We build the file: organize receipts, rebuild missing records, and present a clean, persuasive package.
• We aim for the smallest correct tax: reconcile income, substantiate deductions/credits, and address basis/depreciation the right way.
• We protect the future: fix withholding/estimates and set up practical systems so you don’t see the same issue again.
If an IRS letter just landed—or you want to get audit-ready before one does—book a FREE Audit Readiness Call with RDA Tax Services. One conversation, a clear plan, and a calmer year ahead.