What to Expect When You’re Audited by the IRS
What to Expect When You’re Audited by the IRS
Nobody likes the word “audit.” For many business owners, just hearing “IRS audit” is enough to stir up anxiety. Whether you run a small business or manage a larger enterprise, the possibility of being audited is a reality you can’t afford to ignore. As a tax advisor, I often get questions from clients wondering why audits happen, how the process works, and what they can expect if the IRS comes knocking. Let’s break it down so you can be better prepared—and less stressed—if you’re ever selected for review.
Why Do IRS Audits Happen?
The IRS doesn’t randomly throw darts at a board to decide who gets audited. There are a few common reasons both small and large businesses may trigger an audit:
1. Discrepancies and Errors
If the numbers on your return don’t match those reported by banks, vendors, or W-2/1099 forms, that’s a red flag. Even small inconsistencies can lead to big scrutiny.
2. Unusually High Deductions or Expenses
Claiming business expenses that seem out of proportion to your income—like a $50,000 vehicle write-off for a business that made $80,000—may raise eyebrows.
3. Cash-Heavy Businesses
Restaurants, salons, and other businesses that handle a lot of cash often face extra scrutiny because cash is harder to track and easier to manipulate.
4. Home Office or Vehicle Deductions
These are legitimate write-offs, but often misused. If you’re claiming 100% of your car or home for business, that’s a common audit trigger.
5. Random Selection
Yes, sometimes audits are random. The IRS uses statistical formulas and algorithms to select returns that deviate significantly from the norm.
What Happens During an Audit?
The IRS audit process varies depending on the type of audit, but generally falls into one of three categories:
1. Correspondence Audit
This is the most common and least invasive type. The IRS sends a letter asking for clarification or documentation about specific items on your return. You can usually respond by mail.
2. Office Audit
You’ll be asked to visit a local IRS office and bring documents like receipts, bank statements, or ledgers to support your return.
3. Field Audit
This is the most comprehensive. An IRS agent will visit your business (or sometimes your home) to review your records in person.
In all cases, the IRS will inform you in writing—never by phone or email—and provide clear instructions on what they need and by when.
What to Expect If/When You Get Audited by the IRS
While every audit can vary in complexity, here are the basics of what you can expect if the IRS audits you.
- Initial Notice: The IRS will explain what they’re looking at and why.
- Documentation Request: You’ll be asked to provide proof—receipts, invoices, bank statements, and more.
- Interviews or Meetings: Depending on the scope of the audit, you may have one or more conversations with the auditor.
- Audit Report: After reviewing your info, the auditor will issue findings. You’ll either owe more, get a refund, or see no change.
- Appeals Process: If you disagree with the outcome, you can challenge the decision through the IRS appeals process or even in tax court.
How to Prepare and Protect Yourself for an Audit
Being organized is your first line of defense. Good recordkeeping is not just best practice—it’s essential.
- Keep clean, well-labeled records of income, expenses, payroll, and bank statements for at least 3-7 years.
- Use reputable accounting software or hire a professional bookkeeper.
- Separate personal and business finances to avoid confusion.
- Work with a qualified tax advisor to help you prepare accurate returns and navigate the audit process if needed. With more than 25 years in financial management, Dana Jensen is an expert in tax audits and can represent you to the IRS. Contact us now through our website.
Take an Audit Seriously!
Getting audited doesn’t always mean you did something wrong. But, it does mean you need to take the process seriously. Whether you’re a solopreneur or running a company with 100+ employees, the best defense against an audit is consistent, accurate recordkeeping and professional tax guidance.
If you get a notice from the IRS, you need representation. If you’ve received an audit notice—or just want to make sure your books are audit-ready—don’t go it alone. Reach out to a tax professional who can help you respond confidently and correctly. Woodlands Tax Advisors are one of the only certified Enrolled Agents accounting firms in The Woodlands, Texas, and we will take on your case and dispute the IRS on your behalf.