What To Do If You Receive an IRS Audit Letter?

IRS audit. Hearing those words normally strikes fear into the heart of any taxpayer. The reality is that some people will be audited by the Internal Revenue Service (IRS). But, if you do receive a notification from the IRS informing you that you will be audited, there's actually no reason to panic. It can be over quickly if you send the information and documentation the IRS is requesting and follow their instructions.

Table of contents

Key takeaways:...Read more

What is an IRS tax audit?...Read more

Reasons you might get an IRS audit...Read more

What does an IRS audit letter look like?...Read more

Response letter...Read more

Different types of IRS audits...Read more

Key takeaways:

There are several reasons why you might get audited by the IRS
An IRS letter will come via certified mail and will include specific information
There are different types of tax audits, and each has its own requirements

What is an IRS tax audit?

This is a review of your financial information and verifies information on your tax return. It’s carried out by the IRS and can happen to an individual filer, like an independent contractor or freelancer, or a business, like an LLC. Most audits include correspondences via mail, but in some cases, you might have to visit an IRS office, or the IRS might want to visit you. If you're the CEO of a marketing company, for example, and your annual salary is $115,000, there's more of a chance that you'll be audited. Earning more than $100,000 annually drastically increases the likelihood.

Reasons you might get an IRS audit

Errors Look, it’s easy to make a mistake on your 1099 tax return. There are a lot of numbers to keep in mind and boxes to fill out. But, the IRS doesn’t take errors lightly, and a simple math error might result in an IRS tax audit. It’s best to double check your return and review it for errors before submitting it to avoid a fine. You can file error-free taxes with the FlyFin app. Not only does our A.I. find every possible deduction, but our team of expert CPAs carefully reviews your taxes and files your tax return with 100% accuracy and audit insurance. Claiming excessive charitable donations If you're claiming a large sum in charitable donations, beyond what seems doable for your tax bracket, it might raise some questions with the IRS and increase your chances of getting audited. This isn’t to scare you away from donating. The IRS actually encourages you to donate items like clothing, furniture or monetary contributions. But it’s up to you to determine the value of the donation, and claiming an amount too high could lead to an audit. Taking the home office deduction If you’re self-employed and working from home, you’re eligible for the home office deduction. It’s best to use caution when taking this deduction, as it’s easy to deduct an excessive amount or try to claim something that’s not eligible. For example, the chances of getting audited are high if you try to write off all of your home utilities. This is because only a portion of your utilities is tax deductible. The IRS will have some questions if you try to write off your new kitchen island or a recliner. If you use a self-employed tax calculator, you can find all the home office expenses you're eligible to deduct. Not reporting income It might be tempting to leave off some of your income from your tax return. As long as you don’t get caught, it won't cause any harm, right? If you work as a teacher in a local school and tutor students in your local neighborhood in your spare time to earn a little extra cash, it might be tempting only to report the income from your local teaching job, but the income from your tutoring gig must be reported, too. Or, say you work as an accountant, and your hobby is painting. If you sell your paintings in local shops and galleries, you should report both the accounting and painting income on your tax return to avoid an IRS audit letter. Reporting all your income is also essential for calculating estimated tax payments. You should also report any asset sale, like a home or a stock. The IRS has been around long enough to know when someone might be underreporting their income. Doing so might get you an IRS notice for an audit and lead to a hefty penalty, plus interest. Taking too many business deductions Let’s face it. Everyone likes saving money, and taking deductions is an easy way to save on taxes. But business expenses must be both ordinary and necessary to qualify. Your expenses must be ordinary relating to the business and not something over-the-top or, well, out-of-the-ordinary. The expenses must also be necessary in the sense that there is a need for the expense. An ordinary expense for a freelance artist might include paints and paper, but a guitar for her studio might raise an eyebrow with the IRS. The paints and paper are necessary for the artist to complete her paintings, but a guitar isn't necessary for painting. Missing signature Surprisingly, many taxpayers simply forget to add a signature on their tax returns. Failing to sign your tax return will almost certainly result in an IRS audit letter. The IRS might also be left wondering what else you forgot on your tax return. You’ll need to send back a signed copy which could result in a late-filing penalty.

Alt text: Image listing reasons for IRS audit - questionable business deductions, foreign bank account non-reporting, rental losses, undocumented filing status, cash-only business. Relevant for self-employed, 1099, freelancer, and taxes.

What does an IRS audit letter look like?

It’s good to know what to expect in an IRS audit letter, so you don’t accidentally throw it away thinking it was junk mail. Only some IRS letters mean you're getting audited. The IRS tax audit letter will come via certified mail with the IRS name in the return address.

What does an <span style="background: linear-gradient(101.76deg, #19ACA4 1.98%, #3563CD 100.59%);
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The letter, titled "The Notice of Audit and Examination Scheduled," will explain the reasons for the audit, state any additional information needed and include a deadline for submission.

Response letter

As soon as you receive an audit notification from the IRS, you should begin working on your response letter and gather the requested information.

Different types of IRS audits

There’s not one set standard IRS audit. Instead, there are a few different types, each with its own requirements.

Field audit: This takes place at the residence or business location being audited. The IRS needs to interact with the party involved in person when mail correspondences aren’t enough.
Office audit: A representative from the IRS will meet with the taxpayer in person, usually at the IRS office. The main goal of the meeting is to make sure the taxpayer is reporting income accurately and paying the amount owed.
Correspondence audit: Conducted entirely by mail, this is the lowest level for IRS audits and is typically used when the taxpayer makes simple errors.

Dealing with a tax audit can be stressful, but the way to avoid audits is to be honest and truthful on your tax return. If an audit does come your way, you can consult a tax expert for the best advice, like FlyFin's CPA team.

Adjust For Inflations

The IRS has released its yearly inflation adjustment for the 2024 tax year, aimed to give US taxpayers relief from rising inflation.