IRS Audit: What Actually Happens and What to Do

Nobody reads an IRS letter calmly. But the gap between what people imagine an audit is and what actually arrives is enormous. That imagining causes more bad decisions than the audit does.

Here is what the process actually looks like, and what to do in the week after the envelope shows up.

#The three kinds, in order of how common they are

If you own a small business and get an examination letter, it is very probably the first column: a request to prove one thing.

#The first week

Verify the letter is real. Every genuine notice has a notice or letter number, usually in the upper right. Look it up on IRS.gov. The IRS usually first contacts you by mail. It does not demand payment right away by phone, text or email. It will not threaten arrest. After a letter, an IRS employee may call or visit, so check any call against a letter you already have.

Read what is actually being asked. This sounds obvious and is routinely skipped in the panic. Most correspondence audits name one or two specific items and list exactly what documentation would resolve them. That list is the entire assignment.

Note the deadline. It is a real date with real consequences. If you cannot meet it, request more time before it passes. If you need more time, ask in writing before the date. The examiner often says yes for a good reason, but it is not guaranteed.

Do not ignore it. The single most expensive response. If you do not reply, the IRS will send a letter that says you owe more tax. A final notice of deficiency gives you 90 days to challenge it in U.S. Tax Court before the tax is assessed. That date is set by law. Do not miss it. Unwinding that is much harder than answering in the first place.

#Answer exactly what was asked

This is the discipline that separates a two-month resolution from a nine-month one.

If the letter asks about vehicle expenses, send the vehicle documentation. Not your full general ledger, not three years of bank statements, not an explanation of an unrelated deduction you have privately been worried about.

Volunteering material invites questions about material nobody was going to ask about. Every additional document is another surface. The goal is a complete, responsive, bounded answer.

Practical form:

• A short cover letter that names the notice number and tax year, lists what is enclosed, and addresses the specific question
• Clean copies, never originals, organized in the order the letter raised the issues
• Send in a way that gives you proof of delivery, and keep a complete copy of everything you sent

#What substantiation actually means

Most correspondence audits come down to a simple structure: the amount, and the business purpose.

A bank statement proves money moved. A receipt proves what was purchased. Neither proves it was for the business. That is what a contemporaneous note, a calendar entry, a mileage log, or a client name supplies. It is the piece most often missing.

This is why record keeping is not busywork. The claim on the return is only as strong as what you can produce two years later.

If records are genuinely gone, reconstruct what you can. Banks provide statements going back years, vendors reissue invoices, card issuers keep histories. A reconstructed record with an honest explanation is far better than silence.

#Mistakes that make it worse

Ignoring it. Covered above, and worth repeating because it is the most common.

Sending everything. Widening the scope voluntarily.

Calling to argue. Notes get made. Written, considered responses are better than an emotional phone call, and they create a record you control.

Amending in the middle of an examination without advice. It can complicate the position you are already defending.

Fabricating documentation. An unsubstantiated deduction is a disallowed deduction, which costs money. A fabricated document is a different category of problem entirely. Never do this, and be careful that “recreating” a lost log does not slide into inventing one.

#When to bring in representation

You have the right to be represented at any point, and a representative can deal with the IRS on your behalf.

For a single receipt you can put your hands on, handling it yourself is reasonable.

Get help when:

• The amount is significant
• The issue is your business, rather than one line item
• It escalates beyond correspondence
• Your records are incomplete
• You do not understand what is being asked
• You disagree with the conclusion and want to appeal

The cost of representation on a straightforward matter is usually small relative to what an unmanaged examination can turn into. The first response shapes everything after it.

#If the outcome goes against you

An examination result is not the end of the process. You can appeal, and there are procedures for disputing a determination.

If you owe and cannot pay in full, there are structured options rather than a single demand: payment plans, and in some circumstances other resolutions. If the IRS added late filing or late payment penalties and your record is clean, First Time Abatement may remove them. It does not cover the 20 percent accuracy penalty that often comes with an audit. That one can only be removed if you show reasonable cause or that it does not apply.

#The short version

Most audits are a letter about one thing. Verify it is genuine. Read exactly what it asks. Meet the deadline, or ask for more time before it passes. Then answer precisely that question, with clean copies and proof of delivery.

The two failure modes are silence and over-sharing. Avoid both and most correspondence examinations resolve without drama.

If a letter has arrived and you are not sure which kind it is or what it is really asking, bring the notice itself. Which letter it is determines the whole path, and the first response is the one that matters most.