What to Do When You Get an IRS Audit Letter
An IRS audit doesn’t have to be a crisis. Most audits follow a predictable process, and the outcome depends heavily on how you respond. This guide explains how audits work, what the IRS is looking for, and what your options are at every stage.
What an Audit Actually Means for You
If you’ve received an audit letter, here’s what you’re actually dealing with: the IRS has flagged something on your return and wants documentation to back it up. In most cases, it’s a specific item, not your entire financial life. But how you handle the next 30 days determines whether this is a minor inconvenience or a major financial problem.
About 3 out of 4 people who get audited end up with a higher tax bill. But 1 in 4 don’t, and some even get money back. The difference almost always comes down to documentation and how the response is handled. A sloppy or incomplete response to a simple correspondence audit can turn a $500 question into a $5,000 assessment. A well-prepared response to a field audit can eliminate proposed changes entirely.
Most audits are conducted entirely by mail. The IRS sends a letter questioning one or two items, you mail back your records, and it’s resolved. But if you’re self-employed, have business income, or earn above $500,000, you’re more likely to face an in-person examination, and the stakes go up significantly.
Your Income Determines Your Audit Risk
The IRS concentrates its audit resources on returns where additional tax is most likely. Here’s how audit rates break out by income level.
| Income Level | Audit Rate | What It Means |
|---|---|---|
| No Income / Under $25K | 0.3% – 0.4% | Higher than average due to EITC claims, which the IRS scrutinizes heavily. Almost all are correspondence audits. |
| $25K – $50K | 0.2% | Below average. Lowest audit risk of any income group. Typically only flagged for specific mismatches. |
| $50K – $500K | 0.1% | Roughly 1 in 1,000 returns. Most W-2 earners in this range face very low audit risk unless they have complex schedules. |
| $500K – $1M | 0.6% | Risk triples from the band below. More likely to involve field exams and multiple-issue reviews. |
| $1M – $5M | 1.1% | About 1 in 90 returns. Complex income sources, passthrough entities, and large deductions draw attention. |
| $5M – $10M | 3.1% | About 1 in 32 returns. The IRS has been directed to reach 8% coverage for $10M+ filers. |
| $10M+ | 11.0% | More than 1 in 9 returns. Highest priority enforcement tier. Field audits with experienced revenue agents. |
Source: IRS Data Book FY 2024, Table 17 — Examination Coverage. Rates shown are for Tax Year 2019 returns (the most recent year outside the assessment statute window).
Self-Employed and 1099 Earners: You’re a Bigger Target
Income level is only part of the equation. How you earn your money matters just as much. If you’re self-employed, a freelancer, an independent contractor, or you receive 1099 income, your audit risk is significantly higher than a W-2 employee at the same income level.
The reason is straightforward: W-2 income is verified automatically. Your employer reports it, withholds taxes, and the IRS can confirm every dollar. With 1099 and self-employment income, there’s more room for error and more room for underreporting. The IRS knows this, and it targets Schedule C filers accordingly.
What Makes Self-Employment Income a Red Flag
If your bank deposits don’t match your reported income, the IRS will notice. They compare 1099s filed by your clients against what you reported. Discrepancies trigger automatic notices or full audits. Cash-heavy businesses face even more scrutiny because there’s no automatic paper trail.
The IRS compares your deductions against industry norms using the DIF scoring system. If you’re a consultant reporting $120,000 in revenue and $90,000 in expenses, that 75% expense ratio is going to stand out. Vehicle expenses, home office, meals, and travel are the most commonly questioned deductions.
Reporting losses year after year raises the question of whether the IRS considers your activity a business or a hobby. If it’s reclassified as a hobby, you lose the ability to deduct expenses against other income. The IRS looks at whether you’re running the activity with the intent to profit.
Legitimate and valuable, but one of the most frequently audited deductions. The space must be used exclusively and regularly for business. The IRS questions this deduction because it’s easy to claim and hard for them to verify without an in-person examination.
If you’re self-employed and getting audited, the IRS isn’t just checking a single line item. They’re likely looking at your entire Schedule C: revenue, expenses, documentation, and whether the numbers make sense relative to your industry. Having organized records and a clear paper trail is the single most important thing you can do to protect yourself.
The Three Types of IRS Audits
The type of audit you receive determines the scope, the duration, and in most cases, the stakes.
Correspondence Audit
Conducted entirely by mail. The IRS questions one or two specific items on your return and asks you to send documentation. Common targets include charitable deductions, EITC claims, home office expenses, and income discrepancies flagged by W-2/1099 matching.
Typical duration: 3–6 months. No assigned examiner. You respond to a processing center. These audits are simpler but can still result in significant assessments if you don’t respond correctly.
Office Audit
You’re asked to bring records to a local IRS office and meet with a tax compliance officer. Typically targets more complex issues: itemized deductions, rental property, business income/loss, or situations where multiple items need verification.
Usually completed in a single session or day. You can bring a representative (tax attorney, CPA, or enrolled agent) and in most cases you don’t need to attend personally if you have one.
Field Audit
A revenue agent comes to your home, business, or your representative’s office. These are comprehensive examinations that can cover multiple tax years, multiple issues, and involve interviews, document review, and facility tours.
Duration: 6–18 months. Business returns, high-income individuals, and complex tax situations. This is where professional representation makes the biggest difference.
Why Returns Get Selected for Audit
Selection for an audit doesn’t mean you did something wrong. The IRS uses several methods, and understanding them can help you assess what you’re dealing with.
The IRS’s primary selection tool. A computer algorithm scores every return based on how its deductions, income ratios, and credits compare to statistical norms for similar returns. High DIF scores get flagged for human review. You’ll never see your DIF score, but returns with unusual expense-to-income ratios trigger it.
The IRS matches your return against W-2s, 1099s, K-1s, and other third-party documents. Discrepancies between what you reported and what your employers, banks, and brokers reported are the most common audit trigger. This is largely automated through the Automated Underreporter Program.
If a business partner, investor, or related entity is being audited, your return may be pulled in. Common with partnerships, S-corporations, and joint ventures. The IRS examines the entity and then follows the income through to individual returns.
A small percentage of returns are selected randomly through the National Research Program. These are comprehensive audits used to update the IRS’s statistical models. There’s no way to avoid these, but they’re uncommon and you’re not being targeted.
The IRS runs targeted enforcement campaigns focused on specific compliance issues: cryptocurrency transactions, conservation easements, micro-captive insurance, offshore accounts, and large passthrough entities. If your return involves one of these issues, selection risk increases significantly.
The Audit Process: What Happens Step by Step
Whether it’s a correspondence audit or a field exam, the process follows predictable stages with specific deadlines and decision points.
You receive an audit letter specifying the tax year(s) under examination, the type of audit, the issues being questioned, and the documents you need to provide. The letter includes a deadline, typically 30 days. Read it carefully. Everything you need to know about the scope of the audit is in this letter.
For correspondence audits, you mail or fax your supporting documents. For office and field audits, you bring them to the meeting. The IRS can only request documents relevant to the items listed in the audit letter. You’re not required to provide anything beyond the scope of the examination.
The IRS examiner reviews your records, verifies the items in question, and may request additional documentation. For field audits, this can involve multiple meetings over several months. During this phase, everything you say and every document you provide becomes part of the IRS’s file.
The examiner issues a report (examination report or 30-day letter) proposing adjustments. You have three options: agree and sign, request an informal conference with the examiner’s manager, or file a formal protest to the IRS Independent Office of Appeals. You typically have 30 days to respond.
If you disagree and can’t resolve it through Appeals, the IRS issues a Statutory Notice of Deficiency (90-day letter). This is your last chance to challenge the assessment in Tax Court before the IRS makes it final. You have exactly 90 days. Miss this deadline and you lose the right to petition Tax Court.
The audit closes as no change (no additional tax), agreed (you accept the adjustments), or disagreed (you challenge through Appeals or Tax Court). If additional tax is assessed, interest runs from the original due date of the return, not from the audit date.
Common Audit Targets
The IRS doesn’t audit everything on your return. They focus on items with the highest probability of error or underreporting.
Schedule C Income & Expenses
Self-employment income is the most frequently audited item. The IRS compares your reported revenue against 1099s and bank deposits, then scrutinizes business deductions, particularly vehicle expenses, home office, meals, and travel.
Earned Income Tax Credit
EITC claims are audited at 0.78%, far above the average for similar income levels. The IRS questions qualifying children, filing status, and earned income calculations. These are almost always correspondence audits.
Rental Real Estate
Losses claimed against other income, high repair and maintenance deductions relative to rental income, and material participation disputes for real estate professionals are frequent triggers.
Large Charitable Deductions
Deductions that are disproportionate to your income level, noncash contributions, and conservation easement donations are high-audit-risk items. Documentation requirements are strict and specific.
Unreported Income
If your return doesn’t match what third parties reported via W-2s, 1099s, and K-1s, the IRS will question the discrepancy. Cryptocurrency transactions, cash businesses, and foreign income are growing areas of focus.
Passthrough Entities
Partnerships and S-corporations are an increasing audit priority. The IRS follows income and deductions from the entity return to the individual K-1 recipients. Large and complex passthrough structures face elevated scrutiny.
Your Rights During an Audit
The Taxpayer Bill of Rights provides specific protections during an examination. Knowing these rights changes how you interact with the IRS and can significantly affect the outcome.
You can authorize a tax attorney, CPA, or enrolled agent to handle all communications with the IRS. In most cases, you don’t need to meet with the examiner personally. Your representative attends on your behalf. This is one of your most powerful protections.
If you disagree with the examiner’s findings, you can request a conference with the IRS Independent Office of Appeals before the assessment becomes final. Appeals officers are independent from the examination function and can settle cases based on the “hazards of litigation.”
The IRS must tell you why they’re requesting specific information, how they’ll use it, and what happens if you don’t provide it. The scope of the audit should be defined in your initial letter. If the examiner tries to expand the audit beyond the listed issues, you can push back.
You’re entitled to pay only the amount of tax legally owed. If the IRS proposes changes you believe are wrong, you have the right to challenge them through Appeals and, if necessary, Tax Court. Do not sign an audit report you disagree with.
The IRS generally has three years from the date you filed your return to initiate an audit. This extends to six years if you omitted more than 25% of gross income. If you filed a fraudulent return or didn’t file at all, there is no time limit.
When an Audit Results in a Balance You Can’t Pay
If the IRS audit results in additional tax assessed and you can’t pay the full amount, you’re now facing a collection situation. The assessment from the audit becomes a balance owed, and the IRS’s standard collection process begins.
Interest on the additional tax runs from the original due date of the return, not from the date of the audit. On a three-year-old return, that means interest has already been accruing for three years before you even receive the audit letter. Penalties for accuracy-related issues (20% of the underpayment) or fraud (75%) may also apply.
Installment Agreement
Set up monthly payments. Streamlined options available for balances under $50,000. Larger assessments require financial disclosure and negotiation with the IRS.
Offer in Compromise
Settle for less than owed if you qualify. The IRS calculates your reasonable collection potential based on assets and future income. Acceptance rates are at a decade low.
Currently Not Collectible
If paying would cause financial hardship, the IRS can temporarily pause collection. Interest continues accruing, but the 10-year collection statute keeps running.
Audit Reconsideration
If the audit was based on incomplete information, or you didn’t respond to the original audit at all, you can request the IRS reopen and reconsider the examination using additional documentation.
Learn more about resolving IRS tax debt →
Payment plans, Offers in Compromise, penalty abatement, and more.
Business Audits: Higher Stakes, Different Rules
Business returns are audited at significantly higher rates than individual returns, and the consequences can extend beyond the business itself.
All corporate and partnership returns are examined through field audits, never correspondence. The revenue agents assigned to business cases are more experienced and have broader authority to review records, interview employees, and inspect facilities.
For businesses with employees, payroll tax compliance is always examined as part of a business audit. If the IRS identifies unreported payroll tax or failure to remit withholdings, it can assess the Trust Fund Recovery Penalty, shifting the business debt to personal liability for responsible individuals.
Business audits also create passthrough exposure. If your partnership or S-corporation is audited and adjustments are made to the entity return, those adjustments flow through to every partner or shareholder’s individual return. One entity audit can trigger multiple individual assessments.
How We Handle IRS Audits
Our goal is simple: protect your rights, minimize your exposure, and resolve the audit as favorably as possible.
Review the Audit Letter and Assess the Scope
We review your audit notification, identify the specific issues being examined, and assess what the IRS is actually looking for. We pull your transcripts to see what information the IRS already has and determine whether the return as filed is defensible.
Prepare a Response Strategy
We gather and organize the documentation needed to support the positions on your return. For field audits, we prepare for the examiner’s likely questions and determine what to present and in what order. The goal is to substantiate your return positions with the minimum disclosure necessary.
Represent You Through the Examination
We communicate directly with the IRS examiner on your behalf. For office and field audits, we attend the meetings so you don’t have to. We control the flow of information, respond to document requests, and push back on unreasonable positions. Everything goes through us.
Negotiate or Challenge the Outcome
If the IRS proposes changes we agree with, we negotiate the best possible terms. If they propose changes that are wrong, we challenge them through the IRS Appeals process or, if necessary, Tax Court. If the audit results in a balance you can’t pay, we transition into resolution to handle the collection side.
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