What an IRS audit actually looks like

An audit is the IRS examining a return to check that the income, deductions and credits on it are right. Most of them are a letter asking for documents supporting two or three specific lines, answered by mail, and finished without anyone meeting anyone.

Three kinds

By mail. The IRS writes and asks for additional information about particular items on the return. This is the common one, and for most individual returns it is the whole of the experience.

In an IRS office. You are asked to bring records to a local office and answer questions about them. Fewer returns go this way, and the letter says plainly that it is an in-person examination.

At your place. A field examination, where an examiner comes to your business, your home, or your representative's office. This is the rarest of the three and generally involves a business return with records that cannot travel.

Whichever kind it is, the IRS notifies you by mail. It does not initiate an audit by telephone, so a call announcing one is a reason to check the mail rather than a reason to answer questions.

What gets a return looked at

The IRS describes two routes into an examination. One is a statistical comparison: your return is scored against norms drawn from similar returns, and returns that sit far from those norms are more likely to be selected. The other is a related examination, where your return involves transactions with another taxpayer, a business partner or an investor, whose return is already being examined.

In practice that means certain returns draw attention more often than others. Refundable credits with strict eligibility tests, the earned income credit among them, are checked more closely because the money goes out before much of the verification can happen. A Schedule C with a large loss, expenses out of proportion to the receipts, or a set of round numbers that look estimated rather than counted, is easier for a scoring system to notice. So is a return whose income does not match the W-2s and 1099s the IRS already holds, though a plain mismatch usually produces a proposed change rather than an audit.

Selection is not an accusation. A return can be selected and end with no change at all.

What the letter asks for

The IRS sends a written request naming the specific documents it wants to see. That specificity is the useful part: the request tells you exactly which lines are in question, and by omission, which lines are not.

Answer what was asked, and only what was asked. Send legible copies, never originals, organized in the order the request lists them, with a short cover letter mapping each document to the item it supports. Volunteering unrelated records invites questions about years and lines that nobody had raised.

Respond by the date on the letter. If you need longer to assemble records, ask for more time before the date rather than after it, and keep proof of what you sent and when you sent it.

You are expected to have kept records for at least three years from the date the return was filed, which is the practical reason for the shoebox.

Your rights while it runs

The Taxpayer Bill of Rights applies to an examination the same as anywhere else. Four of the ten matter most here.

• The right to be informed. You are entitled to know what the IRS is asking, why, and what it decided.
• The right to retain representation. You may represent yourself or authorize someone to act for you. Form 2848 is the power of attorney that lets an enrolled agent, attorney or CPA speak to the IRS on your behalf, receive the correspondence and attend in your place.
• The right to challenge the IRS's position and be heard. You can raise objections and provide additional documentation, and the IRS is expected to consider them.
• The right to appeal in an independent forum. Most decisions can go to a fair and impartial administrative appeal.

How it ends

An examination closes in one of three ways. No change, meaning you substantiated what was questioned and nothing moves. Agreed, meaning the IRS proposes a change, you understand it and accept it, and you sign. Disagreed, meaning the IRS proposes a change and you do not accept it.

Disagreement is a stage, not a wall. You can request a conference with an IRS manager, and you can take the matter to appeals. The letter closing the examination explains which routes are open and by when, and those dates work like every other date in an IRS letter: they hold your options open while they are running.

How far back it can go

The IRS generally examines returns filed within the last three years, which is also the general period for assessing additional tax. Where examiners find a substantial error, they can look further back, though the IRS says it usually does not go back more than six years.

Exceptions stretch that. A return never filed does not start the clock at all, and certain substantial understatements extend it. If a letter names a year older than three, that is a question worth putting to a preparer before you answer it.