Signs You Might Be Selected For An Audit

Quick answer

• The IRS rarely contacts you by phone or email to inform you of an audit.
• Most audits start with a letter from the IRS, usually by mail.
• Look for official IRS notices with specific case numbers and contact information.
• Significant income changes or unusual deductions can increase audit risk.
• Receiving a notice doesn’t automatically mean you’ll owe money; it’s a request for more information.
• If you receive a notice, don’t ignore it; contact the IRS or a tax professional promptly.

Who this is for

• Taxpayers who are concerned about the possibility of an IRS audit.
• Individuals or businesses who have experienced significant financial changes in the past tax year.
• Anyone who has received a notice from the IRS and is unsure of its meaning or next steps.

What to check first (before you act)

Your Goal and Timeline

Before worrying about an audit, clarify your primary tax-related goal. Are you aiming for maximum refund, minimizing tax liability, or ensuring compliance? Understanding this helps prioritize actions. Your timeline is also crucial – are you filing soon, or is this a retrospective concern?

Current Cash Flow

Assess your current financial situation. Do you have readily available funds to cover potential tax adjustments or professional fees? Understanding your cash flow helps determine your capacity to respond to any audit-related demands without causing financial distress.

Emergency Fund or Safety Buffer

Having an emergency fund is always wise, but it’s especially important if you’re concerned about an audit. This buffer can cover unexpected expenses, including professional help or any tax liabilities that might arise. Aim for 3-6 months of living expenses.

Debt and Interest Rates

Review any outstanding debts. High-interest debt can quickly erode your financial health. If an audit leads to an unexpected tax bill, managing existing debt becomes even more critical. Prioritize paying down high-interest debt to free up cash flow.

Credit Impact

While an audit itself doesn’t directly impact your credit score, unpaid tax debts can lead to liens and levies, which negatively affect your credit. Addressing any potential tax issues proactively can help protect your creditworthiness.

Step-by-step (simple workflow)

Step 1: Receive a Notice

What to do: Open and read any mail from the IRS carefully. Do not discard it.
What “good” looks like: You receive standard IRS correspondence that is clearly identifiable and provides actionable information.
Common mistake and how to avoid it: Ignoring mail from the IRS because you fear it’s bad news. Avoid this by opening all mail promptly; delaying only makes the situation worse.

Step 2: Verify the Notice

What to do: Check that the notice is legitimate. Look for an official IRS letterhead, a notice number (e.g., Letter 3219, Notice CP2000), and a specific case or taxpayer ID.
What “good” looks like: The notice has all the hallmarks of official IRS communication.
Common mistake and how to avoid it: Falling for phishing scams that impersonate the IRS. Avoid this by never clicking links in emails or responding to unsolicited phone calls claiming to be from the IRS. Always verify through official channels.

Step 3: Understand the Notice Content

What to do: Read the notice thoroughly to understand its purpose. Is it requesting more information, proposing adjustments, or informing you of an audit?
What “good” looks like: You have a clear understanding of what the IRS is asking for or stating.
Common mistake and how to avoid it: Misinterpreting the notice or overlooking key details. Avoid this by taking your time and, if unsure, seeking clarification.

Step 4: Identify the Type of Audit (If Applicable)

What to do: If the notice indicates an audit, determine the type. It could be a correspondence audit (handled by mail), an office audit (at an IRS office), or a field audit (at your home or business).
What “good” looks like: You know the specific type of audit and what it entails.
Common mistake and how to avoid it: Not understanding the implications of different audit types. Avoid this by researching the specific audit type mentioned in the notice.

Step 5: Gather Requested Documents

What to do: Collect all financial records, receipts, statements, and tax forms related to the tax year and items mentioned in the notice.
What “good” looks like: You have a complete and organized set of all requested documentation.
Common mistake and how to avoid it: Providing incomplete or disorganized records. Avoid this by meticulously organizing your documents before submission.

Step 6: Consider Professional Assistance

What to do: Decide if you need help from a tax professional (CPA, Enrolled Agent, tax attorney). This is especially advisable for complex issues or formal audits.
What “good” looks like: You have identified and potentially engaged a qualified tax professional.
Common mistake and how to avoid it: Trying to handle a complex audit alone without adequate knowledge. Avoid this by recognizing when professional expertise is necessary.

Step 7: Respond by the Deadline

What to do: Submit your response or requested documentation to the IRS by the date specified in the notice.
What “good” looks like: Your response is sent and received by the IRS before the deadline.
Common mistake and how to avoid it: Missing the deadline. Avoid this by noting the deadline prominently and planning your response well in advance.

Step 8: Follow Up

What to do: If you haven’t heard back after a reasonable period, follow up with the IRS or your tax professional.
What “good” looks like: You have a clear understanding of the status of your case.
Common mistake and how to avoid it: Assuming the issue is resolved without confirmation. Avoid this by actively tracking the progress of your case.

Common mistakes (and what happens if you ignore them)

Mistake	What it causes	Fix
Ignoring IRS notices	Escalation of the issue, potential penalties, interest, and even enforced collection actions (liens, levies).	Respond promptly to all IRS correspondence by the specified deadline.
Providing incomplete documentation	The IRS may disallow deductions/credits, leading to a higher tax bill, penalties, and interest.	Meticulously gather and organize all requested records before submitting them.
Lying or misrepresenting information	Serious penalties, potential criminal charges, and damage to your credibility with the IRS.	Be honest and accurate in all communications and documentation provided to the IRS.
Missing deadlines	Automatic penalties and interest accrual, and the IRS may proceed with assessments based on their own figures.	Note all deadlines on a calendar and start working on your response well in advance.
Not seeking professional help	Increased likelihood of errors, missed opportunities for legitimate deductions, and a potentially larger tax bill.	Consult with a qualified tax professional (CPA, Enrolled Agent) if the notice is complex or you feel overwhelmed.
Responding aggressively or defensively	Can hinder cooperation and potentially lead to a more thorough examination of your return.	Maintain a calm and cooperative demeanor when communicating with the IRS or its representatives.
Failing to understand the notice	Providing incorrect information or failing to address the IRS’s specific concerns.	Read the notice carefully and seek clarification if any part is unclear.
Not keeping copies of correspondence	Difficulty in tracking the case or proving what was submitted if disputes arise later.	Keep copies of all letters sent to and received from the IRS, along with proof of mailing.
Overstating deductions or credits	Disallowance of those items, plus penalties and interest.	Only claim deductions and credits for which you have legitimate documentation and meet all eligibility requirements.
Not having an adequate emergency fund	Financial hardship if an audit results in an unexpected tax bill that cannot be paid immediately.	Build and maintain an emergency fund to cover unexpected expenses, including potential tax liabilities.

Decision rules (simple if/then)

• If you receive a notice from the IRS, then open and read it immediately because ignoring it can lead to more severe consequences.
• If the notice is from an unknown sender or via email/phone, then be highly suspicious because the IRS primarily communicates by mail for official matters.
• If you don’t understand the notice, then contact the IRS directly or consult a tax professional because misinterpretation can lead to incorrect actions.
• If the notice requests specific documentation, then gather all relevant records meticulously because incomplete submissions can result in disallowances.
• If the matter is complex or involves significant amounts, then engage a tax professional because their expertise can protect your interests and ensure compliance.
• If you are unsure about the legitimacy of a notice, then verify it by calling the IRS directly using the phone number on their official website, not the one provided in the notice.
• If you have a history of aggressive tax positions or significant income fluctuations, then be extra vigilant about IRS correspondence because these factors can increase audit risk.
• If the notice proposes adjustments to your tax liability, then review them carefully and respond with supporting documentation or an explanation because you have the right to disagree.
• If you discover you made an error on your return that the IRS has identified, then cooperate and provide corrections because this can help mitigate penalties.
• If you are facing a formal audit (office or field), then definitely seek professional representation because these audits are more involved.
• If the IRS deadline is approaching, then prioritize completing your response because missing it incurs penalties and interest.
• If you have a valid reason for needing an extension to respond, then contact the IRS proactively to request one because they may grant it under certain circumstances.

FAQ

How does the IRS typically notify you of an audit?

The IRS almost always sends an official letter by mail to your last known address. They will not call you or email you to inform you of an audit.

Can I ignore a notice from the IRS?

No, you should never ignore a notice from the IRS. Ignoring it will lead to penalties, interest, and potentially more serious collection actions.

What should I do if I receive a letter from the IRS?

Open the letter immediately, read it carefully to understand its content, and identify any deadlines. If you are unsure, seek professional advice from a tax preparer or tax attorney.

What is the difference between an audit notice and a bill?

An audit notice is a request for information or a proposal to change your tax return. A bill is a demand for payment of taxes owed, often resulting from an audit or other IRS assessment.

How can I tell if an IRS notice is a scam?

Be wary of any IRS communication that asks for personal information via email or phone, demands immediate payment with a specific payment method (like gift cards), or threatens arrest. The IRS typically communicates via mail.

What are common reasons for an IRS audit?

Common reasons include claiming large or unusual deductions, having significant changes in income from year to year, not reporting all income, or filing returns with complex transactions.

Can I resolve an audit by mail?

Yes, many audits, particularly correspondence audits, can be resolved through mail by providing the requested documentation and explanations.

What happens if I can’t provide the requested documents?

If you cannot provide the requested documents, the IRS may disallow the deductions or credits in question, leading to additional tax, penalties, and interest. It’s best to explain your situation to the IRS.

What this page does NOT cover (and where to go next)

• Specific IRS audit procedures for every possible scenario. (Next: Research IRS Publication 1, Your Rights as a Taxpayer.)
• Legal advice or tax law interpretation. (Next: Consult a qualified tax professional.)
• How to prepare fraudulent tax returns. (Next: Focus on accurate and compliant tax preparation.)
• Detailed strategies for tax evasion. (Next: Learn about legitimate tax planning and compliance.)
• The exact probability of being audited for any given return. (Next: Understand general audit selection factors.)