IRS Audits Unveiled: How Long, What to Expect, and How to Navigate?

Receiving a tax audit notice from the IRS can be worrying, but knowing what to expect can really help. Even though the IRS only audits a small number of tax returns each year, they are paying more attention to people with complex tax situations. Typically, a straightforward audit can take anywhere from three to six months to complete, depending on how complicated the issues are and how quickly you can provide the needed information.

By learning about the audit process, which follows clear IRS rules, you can reduce stress and approach your audit with confidence. Read along to get the knowledge you need to handle this procedure well.

Hopkins CPA Firm is here to assist you in your tax journey by offering additional services like addressing unfiled tax returns, negotiating offer in compromise with the IRS, providing innocent spouse relief, and facilitating penalty abatement. Rest assured, we ensure your tax matters are resolved with expertise and care.

What Triggers an IRS Audit?

An IRS audit isn’t random; specific triggers prompt the IRS to examine your tax return more closely. Understanding these triggers can help you stay prepared and potentially avoid audits. Common Reasons for Being Audited are:

  1. High Income: Taxpayers with incomes over $200,000 are more likely to be audited. The IRS tends to scrutinize returns that report significant income levels.
  2. Large Charitable Deductions: While charitable donations are tax-deductible, unusually large deductions compared to your income can trigger an audit. Ensure all contributions are documented properly.
  3. Home Office Deduction: Claiming the home office deduction can be a red flag if not done correctly. The space must be exclusively used for business purposes.
  4. Unreported Income: Failing to report all taxable income, such as investment income, side gigs, or freelance work, can trigger an audit. The IRS receives copies of all W-2 and 1099 forms, so discrepancies can easily be spotted.
  5. Excessive Business Expenses: Claiming excessive deductions for business expenses, especially those that seem personal in nature, can prompt an audit. This includes travel, meals, and entertainment expenses.
  6. Cash Businesses: Operating a business that deals primarily in cash, such as restaurants or salons, can raise suspicion of underreporting income.
  7. Foreign Accounts: The IRS requires reporting of foreign bank accounts and income. Failure to comply with these requirements can lead to an audit.
  8. Automated Flags: The IRS uses algorithms to compare tax returns against statistical norms. If your return deviates significantly from the average, it might be flagged for further review.
  9. Earned Income Tax Credit (EITC): Claiming the EITC often triggers audits, especially if there are discrepancies in reported income or the number of dependents.
  10. Significant Changes: Large swings in income, deductions, or credits from year to year can raise questions and trigger an audit.

By being aware of these common audit triggers, you can take proactive steps to ensure your tax returns are accurate and fully compliant, reducing the likelihood of an IRS audit.

How Long Does an Audit Take?

The duration of an IRS audit can vary depending on factors like the type of audit, the complexity of tax issues, promptness in providing requested information, scheduling meetings, and whether you agree with the findings. Now, let’s delve into how long can the IRS audit take and what factors influence it in detail.

Types of Audit

Before we proceed to the timeline, let’s clarify the types of audits you might face, as the type significantly influences how you prepare:

  • Correspondence Audit: This is the simplest and most common type of audit. It accounts for about 75% of all audits. The IRS will mail you a letter (often a 566 letter) asking for more details or documentation about certain items on your tax return, such as auto expenses or other deductions.You must mail the required documentation and if there’s a discrepancy between your tax return and IRS records, you might get a CP2000 notice, which requires you to either agree with or dispute their findings to avoid complications.
  • Office Audit: This audit is more detailed than a correspondence audit and is used when the IRS questions are too complex to be handled through the mail but not severe enough for a field audit.
    You will be asked to visit an IRS office where common issues like itemized deductions and business income are examined, and it’s crucial to provide accurate and complete information as the audit may expand based on the auditor’s findings.
  • Field Audit: This is the most thorough and invasive type of audit. IRS agents visit your home or business to conduct a detailed examination.
    During a field audit that can last several days depending on its complexity, agents may review your financial records and business operations, including employee interviews and facility inspections, and it’s advisable to have a tax attorney present.
  • Taxpayer Compliance Measurement Program (TCMP) Audit: A rare but intensive audit type is used by the IRS to update its scoring system for selecting returns for audit.

Understanding the IRS Audit Process Timeline

Understanding the IRS audit process can significantly reduce anxiety and prepare you well for the procedure. Below, we outline each key phase of the audit from start to finish.

1. Initiation of Audit

  • The IRS audit process begins with a notification sent by mail. This letter informs the taxpayer that their return has been selected for examination and outlines the specific items under review.
  • The IRS never initiates audits by phone or email.

2. Examination Phase

  • During the examination phase, the IRS reviews the taxpayer’s records and documentation related to the issues in question. This can be done via correspondence (mail), at an IRS office (office audit), or at the taxpayer’s place of business (field audit).
  • The IRS might request additional information or documentation to substantiate the items reported on the tax return.

3. Resolution Phase

  • After reviewing the information, the IRS will make a determination and send a report detailing any proposed changes to the tax return. If the taxpayer agrees with the findings, they sign the report, concluding the process.
  • If additional taxes are owed, the taxpayer must arrange payment. If a refund is due, it will be processed accordingly.

4. Appeals Process

  • If the taxpayer disagrees with the IRS’s findings, they have the right to appeal. The IRS Office of Appeals is an independent entity that resolves disputes without litigation.
  • During the appeals process, the taxpayer can present additional information and arguments supporting their position. If the appeal is unsuccessful, the taxpayer may take their case to the U.S. Tax Court.

Understanding each phase of the IRS audit process helps taxpayers prepare adequately and address any issues that arise, ensuring a smoother and less stressful experience

Understanding IRS Audit Implications on Tax Return Timelines

Dealing with an IRS audit means knowing how do the IRS audits work and how they might impact or be influenced by when you file your tax returns when you get your refunds, and if you make any changes to your returns.

Filing Deadlines

Filing your tax return by the due date (April 15th, or the next business day if it falls on a weekend or holiday) is crucial. Late filings can raise red flags and increase the likelihood of being selected for an audit.

Filing late without an approved extension can not only result in penalties and interest but also make your return more conspicuous, possibly prompting an IRS review.

Refund Processing Times

Typically, the IRS processes refunds from electronically filed returns within 21 days and paper returns within six weeks. However, if your return is selected for audit, this process can be significantly delayed.

If you notice an unusual delay in your refund, it could be a sign that your return is under review or has been selected for an audit, especially if accompanied by a request for more information from the IRS.

Don’t worry Extensions and Amendments are available:

  • Filing Extensions: While filing an extension (using Form 4868) gives you until October 15th to file your return, it does not extend the time to pay any taxes owed. Note that returns filed under extension may be scrutinized more closely, especially if taxes are paid late.
  • Amending Returns: Filing an amended return (using Form 1040-X) can also attract IRS attention, particularly if the amendments significantly alter the tax liability or claim additional refunds. The IRS typically takes up to 16 weeks to process amended returns, but this process can be extended if the amendment leads to an audit.

Minimize Your Risk of IRS Audit with us

To lower your chances of an IRS audit, make sure to file your taxes fully and on time, report all your income (from both within the US and abroad), and follow all tax reporting rules closely.

If you’re unsure about how to handle these IRS audits, we’re here to help. Our firm not only offers help with IRS audits but also provides a wide range of services, including insurance planning services, tax preparation for businesses, and tax preparation services in Texas (and beyond), to help manage all your financial needs effectively.

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Joe Hopkins

Joe has 25+ years as a Certified Public Accountant licensed in the State of Texas and solving IRS problems. Current member with the American Institute of Certified Public Accountants (AICPA), Texas Society of CPA’s (TSCPA), National Society of Accountants (NSA), Bachelor’s degree in accounting (BBA), Master’s degree in Business Administration (MBA) at Texas A&M Corpus Christi. Experience in a variety of industries as Controller, CFO and tax resolution issues for both business and personal tax cases.