How to Handle a Tax Audit

How to Handle a Tax Audit

Getting audited by the IRS may sound intimidating, but with proper knowledge and preparation, it doesn’t have to be a nightmare. A tax audit is simply a review of your tax return to ensure all information is reported correctly according to the tax laws and that the amount of tax reported is accurate.

Key IRC Sections and IRS Forms

• IRC §6003 – IRS authority to examine records
• IRC §6121 – Limitations on IRS audits (usually 3 years)
• IRC §6672 – Penalties for negligence
• Form 4564 – Information Document Request (IDR)
• Form 8668 – Extension of time to provide audit documentation
• Form 886-A – Explanation of Items (used by IRS to explain adjustments)

What Triggers a Tax Audit?

• High deductions compared to income
• Self-employed or gig income without matching 1099s
• Claiming excessive business losses over several years
• Unreported income (IRS matches W-2s, 1099s, etc.)
• Home office deductions without proper documentation
• Cryptocurrency transactions without reporting on Form 8949

Audit Types

• Correspondence Audit: Done by mail; minor issues like mismatches
• Office Audit: Conducted at a local IRS office
• Field Audit: IRS visits your home or business

Example: Business Deduction Discrepancy

John, a freelance software developer, claimed $30,000 in business expenses on $45,000 in income. The IRS flagged his return and issued a Form 4564 requesting receipts and mileage logs. After submitting incomplete records, the IRS disallowed $12,000 of the deductions, resulting in $2,500 in taxes owed and a $500 accuracy-related penalty under IRC ¦6672.

Step-by-Step: How to Handle an IRS Audit

1. Don’t Panic: Review the audit notice carefully and note the response deadline.
2. Gather Documents: Receipts, bank statements, logs, and contracts.
3. Respond Promptly: Use Form 4564 to provide requested information.
4. Consult a Tax Professional: Hire a CPA or EA with audit experience.
5. Stay Organized: Label and summarize supporting documents.
6. Know Your Rights: You can appeal, request meetings, and seek mediation.
7. Request More Time: Use Form 8668 if needed.
8. Review IRS Findings: Respond to Form 886-A if adjustments are proposed.
9. Appeal or Settle: If you disagree, file an appeal or negotiate a settlement.

Conclusion

An audit can be a manageable process if approached methodically. With proper records, professional support, and timely responses, many audits can be resolved without stress or large penalties.

Call to Action

Facing an IRS audit or want to prevent one?

Anshul Goyal, CPA EA FCA is a licensed U.S. Certified Public Accountant, IRS Enrolled Agent, and experienced in audit representation and tax controversy resolution.

Disclaimer

This blog is for educational purposes only and should not be considered professional tax advice. Please consult a licensed CPA or EA for assistance with audits.

Top 5 FAQs

1. How long does an IRS audit take?
   Most audits are completed within 3 to 6 months, depending on complexity.
2. Can I go to jail for an audit?
   Not usually. Audits are civil processes. Jail is rare and only occurs in cases of proven fraud.
3. Do I need a CPA to handle my audit?
   While not required, a CPA or EA can guide and represent you before the IRS.
4. Can the IRS audit old returns?
   Usually within 3 years, but up to 6 years if major underreporting exists.
5. What if I can’t pay the taxes owed?
   You can set up a payment plan or negotiate an Offer in Compromise.

About Our CPA

Anshul Goyal, CPA EA FCA, is a U.S. Certified Public Accountant and IRS-authorized Enrolled Agent. He represents clients in IRS audits, tax litigation, and complex filings across the U.S. and internationally.