An IRS audit examines your financial records to confirm you’ve reported income and paid the correct tax. While the word “audit” sparks fear, being chosen doesn’t always mean you did something wrong.
The IRS uses multiple methods to select returns, and many are automated. Here’s what you need to know about how audits work and what may trigger them.
How Does the IRS Select Taxpayers for Audit?
The IRS has a few ways of deciding whose returns to examine.
Algorithms and Statistical Norms
The IRS uses advanced computer algorithms to compare your return against similar taxpayers. If your return falls far outside the average, it may get flagged.
Related Transactions
If your return links to another taxpayer who is being audited — for example, a business partner or investor — your return might also be selected for review.
Auditor Review
After the system flags a return, an IRS auditor may decide it looks fine or pass it along for a deeper examination.
What Types of IRS Audits Exist?
There are two main forms of audits:
- Mail audits: The IRS sends you a letter asking for supporting documents, such as proof of income, deductions, or expenses.
- In-person audits: These may take place at your home, office, accountant’s office, or at an IRS office.
In both cases, you’ll always be notified by mail first, and the IRS will outline what they need. You can sometimes request an in-person audit if mailing documents isn’t practical.
How Far Back Can the IRS Audit You?
Generally, the IRS can audit returns from the past three years. If they find substantial errors, they may go back further, though they rarely extend past six years.
Common IRS Audit Triggers
Some patterns and choices on tax returns raise red flags.
You Didn’t Report All Income
The IRS receives copies of your W-2s and 1099s. If your return doesn’t match their records, it’s a major audit trigger. Freelancers or people with multiple jobs should double-check that every form is included.
You Own Foreign Property or Bank Accounts
Taxpayers with foreign assets are closely scrutinised. If you have overseas accounts exceeding $10,000, you must file FinCEN Form 114. For assets over $50,000, you must also report them on Form 8938. Missing these forms is a red flag.
You Claimed a Home Office Deduction
The home office deduction is legitimate, but it’s often abused. To qualify, the space must be used regularly and exclusively for business. If you claim it incorrectly, expect questions.
You Reported Continuous Business Losses
New businesses sometimes lose money early on, but a business that reports losses every year looks suspicious. The IRS may investigate whether it’s truly a business or just a way to claim deductions.
Your Business Expenses Look Too High
If your deductions are much higher than other businesses in your industry and income bracket, the IRS may dig deeper. Keep receipts and detailed records for at least three years.
You Didn’t Report Cryptocurrency Transactions
The IRS treats cryptocurrency like property. Selling, trading, or receiving crypto as payment must be reported. Exchanges issue 1099 forms, and the IRS receives copies. Failing to declare crypto income can lead to an audit.
What Happens If You’re Audited?
- The IRS will contact you by mail first with clear instructions.
- They may request documents or schedule an in-person review.
- You’ll have the chance to provide explanations and supporting evidence.
If you’re worried about making mistakes or overpaying, it’s wise to have professional IRS audit representation.
How Tax Law Advocates Can Help
Facing an audit doesn’t mean you’re guilty. But without expert help, you could end up paying more than you should.
At Tax Law Advocates, our experienced attorneys, enrolled agents, and accountants know IRS audit procedures inside and out. We:
- Review your records to identify strengths and weaknesses.
- Represent you directly before the IRS.
- Protect your rights and ensure you don’t overpay.
Whether you’re in Texas, California, or anywhere across the U.S., we’re here to stand between you and the IRS.
📞 Call 855-612-7777 today to get professional representation and peace of mind.
