The envelope arrives. It’s thin, plain, and bears the return address of the Internal Revenue Service. Your heart sinks. For most people, a letter from the IRS is a source of immediate anxiety. When that letter is an audit notice, the anxiety can turn into outright fear. I’ve seen it countless times. Good, honest people who suddenly feel like criminals, picturing agents seizing their property or shutting down their business. They imagine the worst because the audit process is intentionally intimidating and opaque.
My name is Venar Ayar. I founded Ayar Law because I saw too many people in our community being crushed by tax problems they didn’t know how to solve. An IRS audit is a formal investigation into your financial records, and it carries significant risks if not handled properly.
What to Expect:
This post will pull back the curtain on IRS tax audits. You’ll learn why the IRS selects certain tax returns, the different types of audits you might face, and what you can expect from start to finish. I’ll explain your rights and the critical steps you must take to protect yourself.
The first question everyone asks is, “Why me?” Though a small number of audits are randomly selected, most IRS audits are the result of red flags. The selection of tax returns for an audit is a calculated process. The agency uses a computer program and statistical formula to compare your return to national norms for taxpayers in similar financial situations. If your return stands out, you’re more likely to be selected for audit.
These red flags consistently increase your chances of being selected for an audit:
It’s a myth that only those trying to commit tax fraud get audited. Many audits conducted by the IRS are for honest mistakes or simply because a taxpayer’s financial situation is complex. Being self-employed, owning a cash-intensive business, or having foreign bank accounts increases your risk of being audited by the IRS. The goal is to ensure tax compliance across the entire tax system.
An IRS audit is not a one-size-fits-all event. The type of audit you face depends on the complexity of the issues and what the IRS examiner wants to investigate. Here’s what you might encounter:
This is the most common and least invasive type of audit. A correspondence audit is handled entirely by mail. You’ll receive an IRS letter, often sent by certified mail, requesting supporting documentation for a specific item on your tax return. For example, the IRS may question your charitable donations or medical expense deductions. You typically have a set time to respond with the necessary documents. A poor response can lead to proposed changes that increase your tax bill or escalate into a more serious audit.
An office audit requires you to visit an IRS office for a face-to-face meeting with an IRS auditor. This audit focuses on specific issues that are too complex for a correspondence audit. The audit letter you receive will list the exact items under review and the financial records you need to bring, such as bank statements, receipts, and logs. An office audit is more serious, and you should never attend one alone. You have the right to have a tax attorney represent you.
A field audit is the most comprehensive and serious type of audit. An IRS agent will visit your home or business location to conduct a thorough review of your books and records. These audits are typically reserved for businesses or complex individual tax returns. The agent will examine your accounting procedures, internal controls, and overall financial operations. A field audit can be extremely disruptive and stressful, and having expert representation is critical.
The TCMP audit is the rarest and most intensive of all audits. The IRS uses these line-by-line audits to gather data for its statistical formula. If you are selected for a TCMP audit, the IRS examiner will scrutinize every single number on your tax return, and you must provide documentation for everything. Most tax audits are targeted, but TCMP audits are comprehensive investigations into your entire financial life for a given tax year.
Receiving an audit notice is just the beginning. The audit process itself involves a series of steps where your actions, or inactions, can have significant consequences.
Do not ignore the letter. The IRS will not go away. When the IRS receives no response from you, it will make a decision based on the information it has, which almost always results in you owing more money.
Gather your financial records. This includes bank statements, canceled checks, receipts, invoices, and any other supporting documentation for the items being questioned. Be organized. Presenting a shoebox full of crumpled receipts to an IRS auditor does not inspire confidence.
Understand your rights. You have the right to professional representation. You have the right to be treated professionally. You have the right to appeal an IRS decision you disagree with. The IRS is a powerful opponent. Going up against them without a tax professional who understands tax laws is a risk you should not take. An experienced Michigan tax attorney can handle all communications with the IRS agent, ensuring your rights are protected.
A common question is, “How far back can the IRS audit my tax returns?” The answer depends on the situation.
The general statute of limitations for an IRS audit is three years from the date you filed your tax return. If you filed on April 15, 2024, the IRS typically has until April 15, 2027, to initiate an audit.
If the IRS identifies a substantial error, such as understating your gross income by more than 25%, the statute of limitations can extend to six years. For cases involving unfiled tax returns, the IRS can audit returns for any year that remains unfiled.
To protect yourself, keep accurate records of your tax returns and supporting documentation for at least three years. If you are owed a tax refund, you typically have three years from the date the tax return was filed or due to claim it.
An IRS audit can result in additional tax, penalties, and interest if errors or discrepancies are found. Taxpayers may also be subject to fines or other penalties for non-compliance with tax laws. In severe cases, an audit can lead to criminal charges or other enforcement action. However, many audits result in no changes or proposed changes that can be easily resolved.
If you disagree with the proposed changes, you can request a conference with an IRS manager. If that fails to resolve the tax issues, you can file a formal appeal. This moves your case to an independent appeals officer, who will review your case and try to resolve the dispute without litigation. If you still cannot reach an agreement, your final option may be to take your case to the U.S. Tax Court.
Sometimes, new information comes to light after an audit is closed. In these situations, you may be able to request an audit reconsideration to have the IRS decision reviewed.
Once the audit is complete, the IRS will issue a report outlining any proposed changes or additional taxes that may be owed. Taxpayers can agree to the proposed changes or appeal the decision. If additional taxes are owed, you can pay the amount due or set up a payment plan to settle the balance. The IRS will also provide a notice of any changes to the tax return, including any adjustments or penalties.
An IRS audit is a serious legal and financial challenge. The IRS has a team of agents and auditors whose entire job is to enforce complex tax laws and collect money. Facing them without an expert on your side puts you at a severe disadvantage. You are not required to speak to the IRS yourself. You have the right to have an experienced representative handle it for you.
If you have received an audit letter or are concerned about your tax returns, do not wait for the problem to get worse. The time to act is now.Protect your finances, your business, and your peace of mind. Request a Free Case Evaluation with Ayar Law today. We will review your situation, explain your options, and build a strategy to resolve your tax issues on the best possible terms.