The 4 Types of IRS Audits, and How to Navigate Them

Taxpayer reviewing types of IRS audits with their tax professional

There are 4 types of IRS audits that taxpayers should be prepared to navigate. Each type has different requirements and effective strategies to correctly respond to the audit and resolve the issue.  

Read on to learn about the procedures of each audit, your appeal rights as a taxpayer, and when to seek the help of a tax professional. 

Correspondence Audits

A correspondence audit occurs when IRS has a simple request for more information about a portion of your tax return. For instance, IRS may have inquiries about:

  • Charitable deductions
  • Alimony
  • Moving expenses
  • Casualty losses
  • Employee expenses

These audits are often conducted via mail correspondence and are considered the least severe type of audit. They have become more common over the past few decades — in fact, more than 75% of audits are correspondence audits. IRS most commonly uses correspondence audits for nonprofit organizations and charities.

How to Handle Correspondence Audits

Tax professionals agree that as long as you have receipts and other information the IRS requests, you should feel comfortable responding on your own with no outside assistance. However, if you no longer have the receipts or information requested, call a professional who can help you avoid fines, interest, and penalties. 

You should also seek professional assistance if you disagree with the assessment made by IRS in the correspondence.

Random Audits

Occasionally, IRS randomly assigns an unannounced audit to a citizen – not to try and find anything illegal or in error, but rather to research which areas are likely to produce additional taxes.

Random audits from IRS have become the norm in many industries beyond federal tax collection, after high-profile financial scams such as the Bernie Madoff Ponzi scheme scandal.

How to Handle Random Audits

You might choose to handle this audit yourself, particularly if you are diligent in maintaining your records, receipts, and other paperwork. If you are nervous about any part of your return or lack the documents needed for IRS, hire a tax professional for support.

Office Audits

Should IRS have specific questions regarding your tax return, you may receive a letter in the mail requesting you to visit a local IRS office for a thorough audit. Most office audits focus on individual returns because they are not as complex. For instance, an IRS agent may desire proof of travel expense deductions or educational expenses.

How to Handle Office Audits

Typically, an office visit concludes in one day; any additional information can be supplied by you at a later period. The letter you receive from IRS will define which records you need to bring to the office audit, and you don’t have to volunteer any additional records outside of this scope.

As this is one of the more serious forms of auditing, it’s best to seek assistance from your tax preparer or accountant in preparation for your visit to the IRS office. You may also consider hiring a tax attorney for more in-depth and personalized assistance navigating your audit.

Field Audits

The most severe type of audit is the field audit, wherein an IRS auditor will physically visit your home or office to see certain financial information. However, you may request that your field audit take place at your accountant’s office if that’s what you’d prefer.

How to Handle Field Audits

No field audit should be undertaken on your behalf without some form of representation. As the most serious interrogative path IRS auditors can take, you should assume that they are looking for specific information to penalize you. This comprehensive examination should not be taken lightly, and you and your tax attorney should review your return thoroughly in order to best prepare for this type of audit.

How to Appeal an Audit

When you are summoned to an office audit or receive a field audit, the agent will explain your appeal rights at the beginning of the audit.

You have 30 days to consider your appeal options and alternatives. If you disagree with the audit’s outcome, you may request a further conference with the agent’s manager. You may also appeal to the U.S. Tax Court, the U.S. Claims Court, or your local U.S. District Court.

If you choose to appeal to the U.S. Claims Court or your local U.S. District Court, you will likely have to pay the tax and any administrative refund claims that have been denied by IRS. However, you do not have to pay the tax first if you appeal to the U.S. Tax Court.

Learn more about how to respond to an IRS audit, here.

Any Questions?

Contact Milikowsky Tax Law and schedule a free consultation with one of our experts to discuss your IRS audit. 

Is your small business prepared? Find out by learning five signs your small business is prepared for an IRS audit, here.