The likelihood of getting an IRS audit is very low. We’re talking less than 1%. But in the event that it does happen to you, having Keeper by your side could really help with collecting your proof of expenses and staying organized!
Let’s start with the good news: less than 1% of all US tax returns get audited by the IRS.
Unfortunately, that statistic doesn’t offer much comfort when you’re staring down at an IRS audit letter envelope with your name on it.
What should provide you with some comfort? Most audits are conducted entirely through mail, only last three months, and don’t always end in a larger tax bill.
That’s right — audits can sometimes result in the IRS deciding your numbers were correct all along!
Even if you’ve made a mistake, though, it’s not the end of the world. If you’re a law-abiding taxpayer who does their best to file accurately and on time, an IRS audit is more likely to be a stressful headache than an actual problem.
Let’s walk through exactly what happens when the IRS turns its sights on your return.
What causes you to get audited by the IRS?
Every tax return gets run through an IRS computer. This computer looks for obvious errors: Did you enter your income in one line as $15,000 and another as $150,00? It also compares your return to other, similar returns — for instance, ones filed by people doing the same kind of work.
For each return, it looks for “flags” that could signal errors or suspicious behavior.
At the end of this process, the IRS assigns your return a score based on the number of flags it’s found. Like in golf, the higher your score, the worse you’re doing.
Now, the IRS (understandably) doesn’t say exactly what these flags are, and random selection does come into play. However, here are a few situations that we know are more likely to result in flags:
It’s no secret that if you’re a 1099 contractor or small business owner, you’ll have a higher chance of being audited.
Why? The IRS isn’t just being mean. It’s because filing self-employment taxes is tricky when you’re just learning how — especially if you’ve only ever filed with a W-2. Remember, even honest mistakes can trigger audits.
Self-employed returns are especially likely to raise flags if they include outrageous deductions that are out of the ordinary — like writing off 90% of your house as an exclusive workstation, or claiming a top-end TV is necessary for your job as an Uber driver. As long as you’re being honest and reasonable with your write-offs, you’ll be okay.
Not sure what counts as a reasonable write-off? Keeper will automatically find your business expenses, taking out the guesswork. It will also generate a good set of financial records for you in case the IRS wants to see some proof.
You can even file your returns right through the app — and there are tax professionals standing by to support you if you do get audited.
Having high net worth
If you’re making over $1 million, it's likely you will have a lot of write-offs. Large write-offs!
While these might be legit, the IRS is more likely to scrutinize them. After all, every dollar back in your pocket is a dollar out of theirs.
Large charity contributions
Charitable contributions make for a great tax-saving tool. That also means they’re given a bit more scrutiny from the IRS.
At the end of the day, the IRS looks for what’s reasonable. Unless you have millions sitting in the bank, it doesn’t make a lot of sense to give the majority of your income away.
If you make sizable donations to charity, it’s always a good idea to attach a supplemental statement to your 1040 return listing the specific charities you’re donating to — and how much you’re giving away.
While the IRS might still follow-up, giving them the details upfront minimizes the risk of an audit.
Data entry mistakes
Perhaps you transposed a number from your W-2 form or forgot to include one of your 1099s.
This is a simple and honest mistake. It likely will generate an audit letter, but it is an easy fix — not something that should send you into a cold sweat.
What does an IRS audit notice look like?
If you’re one of the “lucky” ones to hit the audit lotto, you will only ever be notified by mail.
Contrary to what many believe, you’ll never be contacted by phone, email, text, or any other way aside from good old snail mail. The IRS will send the notice to your last known address, which is the address listed on your tax return.
Moved since filing your last return? You can have the post office forward your mail, but the fastest and best way to stay up to date with the IRS is by filling Form 8822. However, if you don’t get your audit letter because you forgot to do either, you can request a Collection Due Process hearing.
How to recognize a legitimate IRS audit letter
There are a few things to look for in a real IRS audit notice or letter. First off, it will arrive as Certified Mail, and will clearly state your identifying information at the top.
Each IRS letter or notice will include a number. For notices, this begins with “CP” (which stands for “computer paragraph” – go figure). For letters, it starts with “LTR.”
IRS notices are clear, concise, and direct. They lay out exactly why you’re being contacted, what action or response you’re required to take, and what to expect next.
Never respond to an IRS notice asking you for personal information — that’s a sure sign of a scam.
Let’s take a look at a few sample IRS audit letters.
When the IRS contacts you about an audit
In this first example, the IRS is making contact at the start of your audit.
It might do this through a few different types of letters or notices, depending on what triggered the audit. Letter 566, for example, is usually used to audit a specific item. Meanwhile, CP75 is used for “correspondence audits involving tax credits,” like the Child Tax Credit.
No matter which specific letter you get, the IRS ultimately wants some proof for whatever income, write-off, or other line item triggered the audit.
Sure, it may seem like a hassle. But as long as you’ve got some documentation, you can wrap things up pretty swiftly.
When the IRS has already adjusted your tax bill
In this next sample notice, CP2000, the IRS has already proposed changes and an amount due.
At this point, you have a few options. You can either:
- Agree, and pay in full
- Agree, and pay in installments
- Disagree, collect proof that the IRS is wrong, and submit it for review
How to respond to an IRS audit notice
Now that you can identify a legitimate IRS audit letter, the question remains: How do you respond?
The good news is the notice itself will tell you what the IRS wants next.
You’ll typically be given 30 days to respond. If you need more time to gather information and documents, you can call to request more time. (Use the phone number on the upper right-hand corner of your IRS audit notice.)
Otherwise, take the following steps.
Step #1: Gather all your documents
Paper receipts, bank statements and credit card statements are all legitimate proof for your tax write-offs. The IRS will also accept canceled checks, cash receipts, and pay stubs.
The key is that your document shows these three items:
- Transaction date
- Payee’s name
- Amount paid
Here’s a detailed list from the IRS of other documentation they might request during your audit.
Step #2: Send a response letter
In addition to the documents the IRS has requested, you should send a letter.
It doesn’t need to be complicated, but it should include a clear statement that you’re complying with the IRS’s request and all your relevant information, such as:
- Your full name
- Your Tax ID number
- Your contact information
- Your point of contact at the IRS (if provided in your notice)
- The number of the notice or letter you got
Not sure where to start? You can copy our free IRS audit response letter template. Download it to your computer, or just reference it when composing your own.
Step #3: Wait for the IRS to get back to you
There are few different types of audits. Most are conducted entirely by mail — you’ll essentially send a series of letters back and forth. Mail audits are generally wrapped up within three months.
Occasionally, though, you may have to come down to an IRS office in person.
For larger audits involving more complex issues, the IRS will sometimes conduct a field audit, where they send an agent to you. But this is extremely rare, and usually only happens when it’s auditing a corporation. Even self-employed people are unlikely to experience a field audit.
What happens if you ignore an IRS audit notice?
Let’s say you decide to completely ignore the notice and not respond at all. Unfortunately, ignoring an audit won’t make it go away. This IRS will simply continue without you — and it generally won’t go well for you.
That’s because, without your input, the IRS will only be working with the information it has. That won’t include your business write-offs (since the IRS has no proof for them). And anything it wants you to clarify will be ignored.
This will almost always result in a larger bill than you’d get from cooperating with the audit. The IRS will even add on extra penalties and interest for ghosting them.
Bottom line: It’s always best to send back something, even if it’s a request for more time. Don’t let the fear of responding lead you into a bad financial situation.
What happens at the end of an audit?
Once you’ve sent in your response, expect a minimum of 30 days before the IRS responds back (again, it will be by mail). At that point, a few different things can happen.
This is good! This means you’ve sent in all the proof the IRS needs, and there’s no change to your filed tax return — which means no additional tax due.
Your IRS audit is officially complete.
More documents needed
This isn’t bad, exactly. It just means the IRS wants to take a closer look at your tax situation.
The audit will continue, and you’ll need to send in the requested information. This might mean showing the IRS records for your write-offs, for example. There's still a chance you won't owe any additional money on your taxes.
This is when the IRS makes an adjustment to your tax bill, and you agree to pay the difference.
It doesn’t necessarily mean you failed your IRS audit — often, you just made a mistake. That’s okay! The IRS can only send you to jail if you’ve committed willful tax fraud (and even then, it’s not easy for it to do).
You will, however, need to pay your new tax bill. If you’re unable to pay the full amount at once, you can set up a payment plan.
The good thing about the IRS is that, if you have proof it made a mistake, you can appeal pretty much any decision — as long as you have a good reason.
Start by contacting the IRS officer who conducted your audit, explaining where you believe the error lies. If that still doesn’t work (and you have reasonable proof that you’re right), you can request a trained Appeals officer to step in and mediate the dispute.
And that concludes your experience with an IRS audit. Congratulations! If you can still afford it, we recommend taking yourself out to dinner to celebrate — or at least opening a big bottle of wine.
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At Keeper, we’re on a mission to help people overcome the complexity of taxes. That sometimes leads us to generalize tax advice. Please email email@example.com if you have questions.