Receiving an IRS audit notice is stressful, but proper preparation and legal representation can make the process far less daunting. Knowing what to expect during an IRS tax audit and how best to organize your tax documents before your first meeting or response deadline has the potential to significantly shorten the audit and reduce the risk of deeper IRS scrutiny. In this guide, we’ll walk through what an IRS Audit is, why they happen, and provide a practical IRS audit checklist, so you can understand what information the IRS is looking for and how best to prepare for the process.
What Triggers an IRS Tax Audit?
The IRS selects tax returns for audit due to a variety of reasons, including:
- Statistical anomalies: income, deductions, or credits that fall outside typical ranges for your profession or income bracket or vary widely between consecutivetax years.
- Random selection: some returns are chosen through the IRS’s DIF (Discriminant Information Function) scoring system.
- Related examinations: your return may be selected because it connects to a business partner, investor, or related entity already under IRS audit.
- Large, unusual, or questionable items: large charitable deductions, excessive home office claims, or cash-heavy business income can become flags for audit selection.
Understanding why you were selected can help you and your tax attorney anticipate which documents the IRS is most likely to scrutinize.
Types of IRS Audits
Before diving into document preparation, it can help to figure out which type of audit you’re facing, since this can affect the scope of documentation required:
- Correspondence audit: handled entirely by mail; typically focused on one or two specific items on a tax return
- Office audit: conducted at a local IRS office; usually a broader review than a correspondence audit
- Field audit: an IRS agent visits your home or business; this is the most comprehensive and detailed audit type
IRS Audit Checklist: Documents You Should Have Ready
Below is a comprehensive IRS audit checklist covering the tax audit documents most commonly requested by the IRS. It can be extremely helpful to organize these by tax year and category before your audit begins, or your first auditor meeting is scheduled.
1. Income Documents (for the tax year under review)
- W-2s and 1099s for all reported income
- K-1s from partnerships, S-corps, or trusts (as applicable)
- Bank statements showing deposits
- Records of any cash income received
2. Expense and Deduction Records (as applicable)
- Receipts for itemized deductions (medical, charitable, business expenses)
- Mileage logs for vehicle-related deductions
- Home office measurements and related utility bills (if claimed on return)
- Invoices and receipts supporting business expense deductions
3. Business Records (if applicable)
- Profit and loss statements
- General ledger and chart of accounts
- Business bank and credit card statements
- Payroll records and 1099 filings for contractors (as applicable)
- Asset purchase records and depreciation schedules
4. Prior Tax Returns
- Copies of the return under audit, plus the two prior years' returns forcontext, as necessary
- Any amended returns filed for the year(s) under audit
5. Supporting Financial Statements (as applicable)
- Mortgage interest statements (Form 1098)
- Investment and brokerage statements
- Retirement account contribution and distribution records
- Loan documents, if debt forgiveness or interest deductions are involved
6. Correspondence and Legal Documents
- The original IRS audit notice (CP2000, Letter 566, etc.)
- Any prior correspondence with the IRS about the tax return
- Powers of attorney (Form 2848) if you're being represented by legal counsel (this is typically submitted to the IRS by your legal counsel on your behalf)
Key Factors to Consider When Organizing your Documents
- Keep originals separate from copies: never hand over original documents to the IRS; provide copies and retain the originals for your records
- Review & Reconcile totals and tax figures: review your documents to ensure the totals in your documentation match what was reported on your tax return; any discrepancies should be reviewed and discussed with your legal counsel before the audit so that explanations can be properly disclosed to the IRS.
How Long Should You Keep Tax Records?
Generally, it’s best to keep tax records for:
- 3 years from the filing date for most accurately reported tax returns
- Indefinitely if you did not file a return or filed a fraudulent return
- 7 years for records related to worthless securities or bad debt deductions
If you’re currently under audit, it’s important to retain all relevant records until the audit, and any appeal, is fully resolved, regardless of these general timelines.
Common Mistakes During IRS Audit Preparation
- Providing more than what is requested. Volunteering unrelated documents to the IRS can open the door to a broader examination.
- Failing to reconcile numbers before the meeting. Discrepancies discovered by the auditor look worse than those you or legal counsel proactively explain.
- Communicating directly with the IRS without guidance. Statements made informally to the IRS can be used to expand the scope of the audit. It’s best to have experienced legal representation to act as a buffer between you and the IRS and to advocate on your behalf.
- Missing deadlines. IRS audit notices come with strict response windows; missing them can result in the IRS adjusting your return without your input. Missing deadlines set by your auditor or being uncooperative has the potential to sour the interaction and cause unnecessary scrutiny.
Do You Need a Tax Attorney for an IRS Audit?
While not every audit requires legal representation, working with a tax attorney is strongly advisable when:
- The audit involves significant sums of income or tax liabilities or multiple tax years
- There’s a possibility of fraud allegations or a criminal referral
- Your business structure or international/offshore assets add complexity
- You’re uncertain how to characterize a deduction or transaction claimed on your tax return
A tax attorney can communicate with the IRS on your behalf, control what information is disclosed, and help ensure the audit stays focused on its original scope.
Frequently Asked Questions
1. How far back can the IRS audit you?
Generally, the IRS can audit taxpayers three years from the date a timely tax return was filed, extended to six years if income was substantially underreported, and with no time limit for unfiled or fraudulent returns.
2. What happens if I don't have all my documents for an audit?
Records can be reconstructed using bank statements, canceled checks, and third-party confirmations, but gaps in documentation increase the risk that a deduction or expense may be disallowed. A tax attorney can help determine which reconstruction methods are best for your specific situation.
3. Should I attend the audit myself or send my attorney?
In many cases, it’s advisable to have your attorney handle direct communication with the IRS. This limits the risk of inadvertent statements expanding the scope of the audit and ensures you have someone knowledgeable on IRS procedures advocating on your behalf.
4. Can an IRS audit lead to criminal charges?
Most audits are civil in nature and result in an adjustment to taxes owed. However, if the auditor identifies indicators of fraud, they can make a criminal referral. This is another reason it can be extremely beneficial to have legal counsel involved early in the audit to determine if you may be at higher risk of a criminal referral.
Get Help with Your IRS Audit Preparation
If you’ve received an IRS tax audit notice, one of the most helpful things you can do is seek legal counsel early. At Rosefelt Tax Law, our tax attorneys and dual-licensed Attorney-CPAs have over 30+ years of experience representing taxpayers under IRS audit. We can help you assemble, reconstruct, and organize your tax audit documents, and manage communications with the IRS from start to finish. Don’t face the IRS alone. Let our team of highly experienced tax attorneys and accountants fight for you.
Contact us today at (866) 995-0061 for a free case review to discuss your IRS audit and how we can help.