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What Does an IRS Audit Mean and What Should You Do?

Writer's picture: Kathryn Hauer, CFP®, EAKathryn Hauer, CFP®, EA
frightened dog

No one likes to pull a letter from the IRS out of the mailbox. Words like “We’re auditing your 2022 tax return and need a response from you” send chills down the spine — it would for me too, and I’m an IRS Enrolled Agent (EA) and long-time tax preparer. For the average small business owner who is going a mile a minute, it’s the last thing you need. What does an IRS audit mean and what should you do?


What Does an IRS Audit Mean?

American citizens permit their elected officials to levy taxes on them for public welfare, including defense, infrastructure, human health, financial well-being, education, and other actions that benefit the common good. As the U.S. government’s arm for collecting those taxes, the IRS tries to fulfill its mission to “help the large majority of compliant taxpayers with the tax law, while ensuring that the minority who are unwilling to comply pay their fair share.”


Most people are honest in reporting their income and expenses to the IRS, but some taxpayers try to cheat the system. An IRS audit is a way for the IRS to make sure that a tax return is an honest one. Try not to be too worried or upset about the audit notice. It will take up some of your time to resolve it, but it’s not an accusation or assumption of guilt and there is little to worry about. 


It feels like a hassle when you are an honest taxpayer who has to deal with an audit, but it’s a logical way to make sure a taxpayer is being honest. When you prepare and submit a tax return, you can report any made-up numbers you want to reduce or eliminate income taxes, and if no one catches you, you are home free. But that’s not fair to the rest of us who pay our fair share. If you and your neighbor both earn $90,000 in income in a year and you pay $12,000 in income taxes and your neighbor fraudulently pays zero, that’s not fair. Everyone needs to pull their weight and follow the rules, and audits are one of the main ways that behavior is shaped.


What Should You Do If You Get Audited?

IRS audits can be via the mail or in person at your home, place of business, or at the office of your tax representative such as a CPA, EA, or lawyer. The letter you receive will tell which kind of audit it is and the steps you need to follow. When you are notified of an audit, you can read the documentation to decide if it’s something you can reply to or handle yourself or if you want to pay someone to help you.


Paper audit: In the case of a paper audit, the documentation may span 10 or more pages, but in it, the IRS will tell you what additional information you need to provide. For example, if you used mileage as a business expense, it may want you to send copies of a logbook you kept to show where, why, and how far you drove for business commitments. Read the document and provide the information requested. Make copies of everything before you mail it — with tracking — back to the address specified in the letter.


In-person audit: If you’ve been scheduled for an in-person audit, you’ll receive a notice that tells you what part of your return is being examined, the information you need to provide, and other details about the audit. The audit can take place in your home, your place of business, an IRS office, or the office of your attorney, accountant, or enrolled agent (a person enrolled to practice before the IRS). If the time or place on the notice isn’t convenient for you, the examiner will try to accommodate you. 


You, the examiner, and your representative (if you have an attorney, accountant, or other eligible person with you) meet for an initial interview that covers information about your financial history, business operations, and books and records. If your business is being audited, the examiner may ask to tour your business to better understand the operation. The examiner will review your documentation. Once the IRS review is complete, it will accept your original return as filed, ask for more information, or propose changes to your tax return.


Records You Might Need to Submit or Bring 

The IRS requires taxpayers to document income and expenses by keeping records. When you submit your tax return, you don’t share any proof with the IRS to support the expenses you claim. In an audit, you provide the documents that prove your deductions are legitimate. If you said you drove 8,000 miles for business purposes, a logbook or electronic spreadsheet of that travel proves that you actually drove your car that far and that when you went, it was for business reasons not personal. If you flew to Orlando and deducted the cost of the airline ticket and the hotel room as a business expense, you’d provide the receipts and explain the business reason for the trip, such as attending a trade show where you had a booth to sell your products. 


In an audit, the IRS isn’t accusing you of lying; in fact, it assumes you are telling the truth and that you can show it that your business required you to spend what you did. The audit reassures the IRS that your claims are truthful and that you paid the right amount in taxes.


List of Common Documents You Might Need

The scope and reason for the audit will determine the records requested, but the list below shows common requests. In addition to the document, you’ll include an explanation of the circumstances surrounding any document you send. Be sure to send copies, not originals.


  • Receipts: Present these by date with notes on what they were for and how the receipt relates to your business. In addition to providing the dollars paid or received for a service or product, certain kinds of receipts can prove mileage.

  • Bills and invoices: Include the name of the person or organization receiving payment, the type of service, and the dates you paid them.

  • Canceled checks: Group these with copies of the bills.

  • Logs or diaries: Electronic and hard-copy logbooks show the dates and locations of your travel and the business purpose and mileage. 

  • Tickets: Label travel tickets with the business reason for the trip and group them with other receipts from the same trip. 

  • Questionnaires: Complete the IRS questionnaire if attached to the audit paperwork you receive.


Mileage Records

Many business owners need to drive as part of their business operations. Keeping track of business miles is important. The IRS suggests that in an audit taxpayers claiming miles should:


  • Send copies of the pages of the hand-written or computer-created log/diary of your business mileage that shows the miles traveled, including a summary page that indicates the business purpose.

  • If you don’t have a log, send a summary statement that shows the locations, frequency, business purpose, and distance to the business sites, being sure to account for all miles claimed.

  • Send two receipts or documents, one from the beginning of the year and one from the end that show the mileage for each vehicle used, such as repair or oil change receipts or insurance documents.


Will It Ever End?

The length of the audit process varies depending on the type of audit; the complexity of the issues; the availability of information requested; the availability of both parties for scheduling meetings; and your agreement or disagreement with the findings.


It will be over in one of three possible ways:


  • No change: An audit in which you have substantiated all of the items being reviewed and results in no changes.

  • Agreed: An audit where the IRS proposed changes and you understand and agree with the changes.

  • Disagreed: An audit where the IRS has proposed changes and you understand but disagree with the changes.


If you owe money, there are several payment options available. Publication 594, The IRS Collection Process explains the collection process in detail.


You’re probably going to feel uneasy from the moment you read an IRS audit notice until the time the matter is fully cleared up. Know that it will come to an end eventually and that you can soon put it behind you.


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