If any two words can literally bring taxpayers to their knees, they're “IRS audit.” It might help to know that most tax audits don’t live up to their dreaded reputation.
The Internal Revenue Service actually doesn’t want to audit you any more than you want it to do so. Full-fledged audits mean a lot of work and aggravation on the part of their agents, and the IRS generally won’t commit to this unless your mistake is pretty egregious, or the IRS feels that there’s a good chance it can collect significantly more tax dollars from you.
A pretty small percentage of filers endure full-blown audits for this reason. Most IRS tax audits are so mundane that Americans don’t even realize they’re technically being audited.
The IRS Computer Sounds an Alert
The IRS has stepped into the computer age right along with the rest of us. It has a computer known as DIF, which stands for "discriminate information function." All incoming tax returns are fed through DIF to get the computer’s opinion of the information contained there.
DIF looks for things that just don’t make sense when they’re compared against statistical norms. The IRS calls these norms its “National Research Program.” DIF assigns each tax return something of a probability score based upon how far it strays from these norms. A high score isn't good in this case. The higher a return’s score, the more likely it is that it will be audited.
An IRS agent will step in for a human look at a tax return when and if DIF becomes agitated. The agent can overrule DIF, or it can tag the return and send it to an examining group. This group will ultimately determine whether the return should be audited.
Common Audit Triggers
DIF doesn’t like deviations from the status quo. For example, most taxpayers with incomes in the $35,000 range do not give $25,000 of that money to charity. DIF will certainly wave a red flag if they try to claim a charitable contribution deduction based on that number. It doesn’t match up with what other, similarly-situated taxpayers are likely to do.
DIF will also pick up on duplicate information and discrepancies in information. It will sound an alert when Social Security numbers appear on more than one tax return, such as if both you and your ex try to claim your child as a dependent.
Or maybe the income you reported doesn’t match up with what was cited on your 1099 forms or W-2 form. Keep in mind that virtually everyone you collect money from during the year must submit copies of these informational returns to the IRS, so the IRS has them on file. Payors must submit a Form 1099-NEC if they pay an independent contractor just $600 or more all year as of tax year 2021. That's not just a single payment but the total of all payments combined.
DIF Might Not Be Involved
Sometimes you might simply be unlucky enough to have crossed financial paths with someone else or another business that’s being audited. It might be a totally innocent correlation, but the IRS feels it’s necessary to take a closer look at your tax situation just to be on the safe side. This can happen even if DIF doesn’t notice anything amiss with your own return. The IRS wants to rule out guilt by association, but your own return won't be audited if an agent doesn’t pick up on an anomaly with it.
Some Audits Are More Serious
Let’s assume the worst – an agent has turned your tax return over to an examining group. What happens next can depend on how serious your mistake was, and – at least to some extent – how you want to handle the problem.
There are three types of audits:
- Correspondence audits
- Field audits
- Office audits
As the name suggests, the first takes place entirely through the U.S. Postal Service. A field audit takes place at your home, your small business location if you’re self-employed, your tax attorney’s office, or maybe your CPA's office. An office audit takes place at an IRS office rather than your home or place of business. The latter two are far more serious, so you might consider hiring a tax professional or tax attorney to attend the meeting or meetings with you.
A correspondence audit is by far the most common of these. Of 452,515 personal income tax returns that were examined in 2020, 359,720 of them were correspondence returns. Of course, COVID-19 had a firm grip on the nation in 2020 and this may have affected the statistics somewhat. The IRS was shorthanded just as many employers were.
These audits might even skip the examining group step because the discrepancy is so minor. Even field and office audits begin with snail-mail notices from the IRS. The agency explains what it’s having a problem with and will ask you to make an appointment.
The IRS will never email or text you, and it won't call you out of the blue without mailing you a notice first. You're being scammed if this happens.
The Correspondence Audit
More often than not, the IRS notice you receive will just ask you to corroborate certain information to support your claims regarding income, deductions or qualifying factors for a tax credit. It might tell you that your math was wrong and you actually owe $1,000, not $500. Of course, these errors could alter your tax refund amount, if you had one coming.
You can simply mail your documentation and evidence (or a check for the additional tax) back to the IRS, or you can request a field or office audit. It's your call if the notice just asks for proof. You can ask for a 30-day extension, which is routinely granted – at least once – if the deadline the IRS cites in the notice is looming and you need a little more time to gather the documentation. Multiple requests probably won’t be honored.
What Are the Statistical Odds of an Audit?
The IRS keeps this information pretty close to its vest, but that hasn’t stopped others from trying to extrapolate the odds of a taxpayer being audited in any of these three ways. Some experts suggest that if you place all Americans in one big bucket, about 1 percent of them will be fished out to receive an IRS notice for one type of audit or another.
Other data indicates that IRS audits steadily declined in recent years, from one out of every 90 returns in 2010 to just one in 160 returns in 2017. The IRS reports that it audited 771,095 in 2019, which really isn't a significant percentage at all when you consider that it processed more than 253 million returns that year. And that number dropped by more than 300,000 in 2020.
But be warned: The federal Ways and Means Committee predicted in November 2021 that audits could skyrocket going forward in response to the Biden Administration's proposal to provide the IRS with $80 million in funding. The Committee has projected an increase of 1.2 million audits a year, more than half of them targeting middle income families with incomes of less than $75,000. The IRS has historically stated that audit risk increases for high earners.
How Long Does the IRS Have to Send You a Notice?
Most correspondence audits are pretty simple, so you can expect to receive notice relatively quickly if the IRS is just asking you to provide proof of your facts or send in more money – a month or two at the most. But otherwise, it might take three to six years before the IRS notifies you that there’s a problem.
Technically, the statute of limitations is three years, absent extreme circumstances. But the IRS has indicated that two years is more the norm, and that it can and sometimes does request an extension from the taxpayer, waiving the initial statute of limitations because it isn’t prepared to make a decision quite yet.
Why would you agree? Because the IRS will otherwise have to make a decision based on the data it currently has on hand, and that might not be in your best interests.
How Long Does an Audit Take?
The duration of an audit depends on the type of audit that’s taking place. If it’s just a correspondence audit, and if you immediately send back the information that’s requested or a check, that could be the end of it. You could potentially put the whole thing behind you with a trip to the post office or to the nearest fax machine.
Otherwise, it will likely depend on the complexity of whatever issue the IRS is investigating and how expeditiously meetings can be scheduled with everyone involved – you, the IRS and your tax representative if you have one. You can expect that the audit probably won’t take more than a year, however, and that’s for the most complex and serious circumstances.
Possible Outcomes: A Correspondence Audit
The IRS might simply nod, say OK, and accept your tax return if it’s just a correspondence audit and you send in the supporting documentation, or it might tell you that your documentation isn’t sufficient and make changes to your return. You have a right to either agree or disagree with those changes, but you typically have only 30 days to act if you disagree.
You’ll sign an examination report if you agree, submit any additional tax you might owe or make arrangements to pay it over time, and that will be that. You can request to talk with an IRS manager so you can present your case again if you don't agree.
More Serious Audits
Federal tax law actually includes a Taxpayer’s Bill of Rights. This doesn’t necessarily put you in the driver’s seat, but you do have some options, even during and after the most grueling audit.
First, you have the right to appeal the auditor’s decision with the IRS Office of Appeals, even if it's just a correspondence audit decision, or you can ask for mediation. You must make the request within the three-year statute of limitations, assuming that it hasn’t been extended, and you’d typically have just 30 days after receiving written notice of the auditor’s decision. You’ll probably want a tax professional’s help with this type of situation.
Some Common Myths
- Filing an amended tax return will not increase your odds of an audit, at least not by itself. Amended returns get fed through DIF too – the process is the same. DIF will only flag an amended return because there’s something iffy about it, not simply because it’s an amended return.
- Having a professional tax preparer do your return is not an audit defense. They make mistakes, too, and you’re still personally responsible for the information that's submitted to the IRS.
- Claiming certain tax credits will not automatically tag you for an audit, either. The IRS doesn’t automatically audit all tax returns that claim them, but you’ll hear from them if DIF says you’re claiming a dependent that another taxpayer has already claimed.
- Claiming a deduction for your home office is not an invitation for the IRS to give you a call, especially in this day and age of remote workers.
A Kinder and Gentler IRS?
The IRS announced in November 2020 that it's taking steps to relieve tax burdens for individuals and some corporations...at least temporarily during the coronavirus pandemic. You'll have 180 days instead of 120 days to pay off a short-term payment plan if you end up owing the agency money after an audit and you just don't have right now.
The IRS will additionally add new tax balances to existing installment agreements for some taxpayers. The procedure under normal circumstances is to cancel existing an installment agreement when a taxpayer files a return with an unpaid balance – something that could conceivably happen when a return is audited and changes are made to it – effectively calling all tax debts due immediately and in their entirety.
You can also ask the IRS to temporarily delay any collection process, at least while America meets the challenges presented by COVID-19, if you're unemployed or otherwise suffering financial fallout.
- IRS: IRS Audits
- TurboTax: Top 5 Myths About Tax Audits
- H&R Block: How to Handle an IRS Audit
- MarketWatch: How to Survive an IRS Tax Audit
- Nolo: Checklist – How to Survive a Tax Audit
- IRS: SOI Tax Stats - IRS Data Book
- IRS: IRS Makes It Easier to Set Up Payment Agreements; Offers Other Relief to Taxpayers Struggling With Tax Debts
- IRS: Reporting Payments to Independent Contractors
- IRS: Compliance Presence
- The National Interest: Tax Return Question: What Are the Odds of Being Audited by the IRS?
- IRS: IRS Audit Rates Significantly Increase As Income Rises
- Committee on Ways and Means U.S. House of Representatives: Americans’ Chances of Audit More than Doubles as Newly Supercharged IRS Targets Lower- & Middle-Income Earners
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.