What Is a Tax Audit?

What Is a Tax Audit?

A tax audit is when the IRS reviews your financial records to check whether you paid the correct amount of tax. Tax audits are sometimes also referred to as "examinations" because the IRS examines your return to ensure accuracy.

If you're selected for an audit, you'll receive a letter by mail with details and instructions to proceed. Don't panic. There's a good chance it's a mail audit, and you won't have to meet with a tax auditor. This is the most common type of audit, and usually it just means the IRS is requesting additional information to confirm the information on your return is accurate and complete.

How Do Tax Audits Work?

When the IRS audits you, they review your records to check if the information you reported on your return is accurate. If you're audited, you'll likely need to submit supporting documents by a stated deadline, including your tax returns from the past three years. If there's any discrepancy found, the IRS may ask for additional returns for up to six years if a return was underreported by 25% or more. No statutory limits apply in cases of intentional tax fraud.

Send all requested documents back to the IRS and explain which documents support the parts of your return the IRS is questioning. If there are simply too many documents to mail—or too much information to convey in a letter—the IRS may agree to a face-to-face audit. The IRS could also request an in-person interview. If you need more time to prepare, you may request an extension.

Be aware: Don't ignore an IRS audit letter. If you do, the IRS can complete the audit on your behalf, charging you taxes and penalties based on the information they have (which you have 90 days to petition). If further IRS communication is ignored, the agency could start collecting on the tax debt by seizing assets, including bank account funds, wages, Social Security benefits and property.

If on completion of your audit the IRS determines you owe more or imposes penalties, you can either agree or disagree. If you agree, you'll sign documentation and may have to pay additional taxes. If you disagree, you can request to meet with an IRS manager, go through an IRS mediation or file an appeal.

What Percentage of Tax Returns Are Audited?

According to the 2024 IRS Data Book, the agency closed 505,514 tax audits, resulting in $29 billion in proposed additional tax. Independent analysis of IRS data shows that only about 0.4% of individual tax returns were audited. That's only about four audits out of every 1,000 returns.

Despite the rarity of tax audits, it's still crucial to report taxes accurately and respond to audit notices promptly, because the IRS may assess taxes and penalties if any discrepancies aren't resolved.

What Triggers an IRS Tax Audit?

There are a number of reasons the IRS may audit you. Here are some of the most common triggers:

• You underreported your income. Each year, the IRS receives copies of your W-2 and 1099, and its system automatically compares those numbers against your tax return. If there's a mismatch and you failed to report income, it could trigger an audit. For example, you could get an audit notice if you forgot to include investment interest or capital gains income during the year.
• You made a math error. Small math errors may lead to an IRS audit notice, as it did over 1 million times in fiscal year 2024, according to IRS data. It may not warrant a full audit, unless further issues are also flagged. Typically, the IRS will inform you of the mistake and offer a way to resolve it.
• You claimed tax benefits. You may have higher odds of being audited if you claim federal tax credits and deductions, especially if you're ineligible or you don't include the proper documentation with your taxes.
• Your business losses and deductions are irregular. If your business's profit or loss on your Schedule C forms differs drastically from what others in your industry claim, it could trigger an audit. Unusual business deductions, unreported income or several consecutive years of reported business losses may also be red flags.
• You had a significant drop in reported income. If your income decreases dramatically from the previous year, the IRS may want to take a closer look at what happened to make sure the income wasn't underreported.
• You had unusually large charitable deductions. You're entitled to claim charitable donations on your tax return, but unusually high contributions may trigger scrutiny from the IRS. Make sure you keep all receipts and documentation that prove the contributions are accurate and made to qualified organizations.

Tip: You can view your IRS records and transcripts using the agency's Get Transcript tool to compare your information with what the IRS has on file. This can help you catch and fix mistakes or shed light on any issues the IRS mentions in a correspondence.

How to Prepare for a Tax Audit

If you receive a tax audit notice from the IRS, follow these guidelines to help you prepare for a tax audit:

1. Carefully review the letter. Pay special attention to the reasons for the audit and the instructions for submitting your documents. Make note of the deadline for your response and request an extension if needed.
2. Gather your documents. Whether you're selected for a mail or in-person audit, you'll need to collect all documents requested in the IRS notice. This could include income forms (W-2s, 1099s), receipts for deductions and previous tax returns.
3. Get missing records. If you're missing documents requested by the IRS, you may be able to reconstruct them. For example, you may be able to document direct deposits or expenses using bank or credit card statements.
4. Respond appropriately. Once you gather the paperwork, it's wise to write a clear summary in response. It may be beneficial to work with an experienced tax accountant who knows tax law and can help you show that your return was prepared accurately and follows IRS requirements.

How to Avoid Being Audited

While audit rates are low, the IRS still audits millions of taxpayers every year. If you want to avoid an audit, there are a few common practices to follow:

• File accurately. The IRS uses automatic processes to catch math errors, underreported income and other mistakes. The best thing you can do is make sure your tax return is accurate and mistake-free.
• Maintain good records. It's your responsibility to keep documents that back up the figures you enter on your return. The IRS recommends keeping tax records for at least six years, so it's a good idea to also keep W-2s, 1099s, receipts, bank statements and other relevant records that confirm the information on your returns.
• Be meticulous and honest. Being honest about the information you report may help reduce your odds of being audited. Taxpayers who overstate deduction amounts or even claim a business loss are audited at higher rates.
• E-file your taxes. When you file electronically instead of mailing a paper return, the IRS e-file system automatically checks your return and flags common issues, like math errors and missing information. Fixing those mistakes before the IRS accepts your return may help reduce the likelihood of an audit to clarify such errors.
• Itemize deductions explicitly. Whenever possible, don't group deductions into general categories, as it may invite suspicion or require verification. For example, if you have a small business, don't include utilities and legal fees under "other expenses" categories. Instead, list each utility bill and legal expense separately to make the costs clear.
• Don't mix personal and business expenses. If you file a Schedule C, make sure it doesn't include any personal expenses. IRS tax laws strictly forbid claiming personal expenses as business deductions or write-offs.
• Be accurate when reporting business losses. Your odds of getting audited may be higher if your tax returns show a net business loss. The IRS could suspect a small net loss or several consecutive years of losses as misreported income or expenses. There's nothing wrong with claiming legitimate, eligible losses, but be sure you can prove them with proper supporting records.

Learn more: Tips to Make Tax Filing Easier

Frequently Asked Questions

The Bottom Line

Staying on top of changes to the tax code can also reduce your chances of getting audited. The recently passed One Big Beautiful Bill Act significantly changes federal tax law. You may benefit from researching the tax changes or working with a tax advisor who can help you file compliant taxes.

Remember, if the IRS finds mistakes, they may impose a 20% penalty on the portion of tax you underpaid due to errors or rule violations. Regardless of how you file your taxes, be sure to keep accurate records that support the information you enter on your tax return.