Being Audited by the IRS: Notices, Rights, and Penalties

Being audited by the IRS means the agency is verifying specific items on a return you already filed — most often by mail, sometimes in person, and frequently ending with no change at all. What determines the outcome is not luck. It is whether you respond by the deadline in the notice, whether your documentation actually supports what you claimed, and whether you use the rights that protect you at every stage. This guide walks through what happens from the moment the notice arrives to the point the file is closed, along with what to do if you owe, disagree, or missed a step.

Start With the Notice and the Deadline

Read the notice through before doing anything else. It tells you which year is being examined, which items the IRS wants to verify, what documents to send, and how long you have to respond.¹ Correspondence audits typically give 30 days. Missing that window lets the IRS make changes using only the information it already has, which is almost never in your favor.

Confirm the notice is real. Genuine audit notices come by mail, never by email, text, or social media. The letter will show a contact phone number and your taxpayer identification number. If anything about it feels off, call the IRS using a number listed at irs.gov, not a number printed on the suspicious letter.

Which Type of Audit You’re Facing

The format shapes your entire response. There are three.

A correspondence audit is handled entirely by mail and covers one or two narrow items, such as a charitable deduction or an education credit. More than 70 percent of IRS audits work this way, and many resolve quickly once the documentation is sent in.²

An office audit brings you (or your representative) to a local IRS office to review specific items in person. The scope is wider than a mail audit but still focused on identified issues.³

A field audit sends a revenue agent to your home, business, or accountant’s office. Field audits ask the widest range of questions, can run for months, and are generally reserved for businesses, high-income individuals, and complex situations.³

For a simple mail audit about a single deduction, you can often handle it yourself. For an office or field audit, or any case with large dollars at stake, bringing in a tax attorney, CPA, or enrolled agent changes the dynamic considerably. A professional can attend meetings in your place under a power of attorney (Form 2848) and can keep the scope from drifting into areas the notice never mentioned.⁴

Gathering and Sending Your Documentation

The quality of your records decides most audits. Pull the original receipts, bank statements, canceled checks, invoices, and any contracts tied to the items under review. For business expenses, that means mileage logs, calendars, and invoices. For medical deductions, bills and insurance statements showing what you actually paid.

The IRS often attaches an Information Document Request listing the exact records it wants, the time period, and the activity involved.⁵ Answer every item. Do not add records the IRS didn’t ask for; extra documents can open new lines of questioning outside the original scope.

Organize by category and cross-reference each document to the line on your return it supports. An auditor who can quickly match a receipt to a deduction on your Schedule C is more likely to close the issue without further requests. Disorganized records tend to broaden what gets questioned.

If you’re mailing paper, use certified mail with return receipt requested so you have proof of delivery. Many correspondence audits also allow uploading through a secure online tool referenced on the notice itself.¹

Your Rights During the Audit

Ten fundamental taxpayer rights apply to every examination, and they are codified, not aspirational.⁶ The ones that carry weight during an audit include the right to be informed of why your return is being examined, the right to challenge the IRS’s position and be heard, the right to appeal to an independent forum, and the right to pay no more than the correct amount of tax.

You have the right to representation at every stage. If you say during any in-person interview that you want to consult an attorney, CPA, or enrolled agent, the IRS employee must stop the interview immediately, even if you’ve already answered questions.⁷ The IRS generally cannot force you to appear personally unless it issues a formal summons.

You can also audio-record any in-person interview with an IRS employee, at your own expense, if you request permission in advance.⁷ If the IRS wants to record, it must tell you beforehand and provide a copy or transcript on request.

During any interview, answer truthfully and stick to what’s asked. Volunteering stories or extra context tends to create problems rather than solve them.

How the Audit Ends

Every audit closes one of three ways.

No change means the IRS accepts your return as filed. You proved your case, and nothing is owed or refunded. This happens more often than people expect.⁸

Agreed means the examiner proposes changes and you accept them. You typically sign Form 870, which lets the IRS assess the additional tax right away. Signing it gives up your right to petition the Tax Court over those adjustments for that year, though you can still pay and later file a refund claim.⁹

Disagreed means you believe the examiner is wrong. That opens the appeal process.

Disagreeing With the Findings

Start by asking for a conference with the examiner’s supervisor. Some disputes end there. If not, you can take the case to the IRS Independent Office of Appeals, which is kept separate from the examination division.¹⁰

After the audit closes with proposed changes, the IRS sends a 30-day letter (Letter 525). You generally have 30 days from the date on that letter to request an Appeals conference.¹¹ The Appeals conference can happen in person, by phone, or through correspondence, and the appeals officer looks at the facts fresh.

If Appeals doesn’t resolve it, the IRS issues a Notice of Deficiency, often called the 90-day letter. This is the last step before litigation. You have exactly 90 days from the mailing date (150 days if you’re outside the United States) to file a petition with the U.S. Tax Court.¹² The key advantage of Tax Court is that you can contest the assessment without paying the disputed tax first. Miss the 90 days and you lose that option; the only remaining route is to pay in full and sue for a refund in federal district court or the Court of Federal Claims.

If You End Up Owing

An adverse audit result usually brings penalties and interest on top of the tax itself. Understanding the pieces helps you decide whether to agree, negotiate, or fight.

Accuracy-Related Penalty

The common one is 20 percent of the underpayment, imposed when the IRS finds negligence or a substantial understatement of income tax. A substantial understatement means the correct tax exceeds what you reported by the greater of $5,000 or 10 percent of the correct tax.¹³ On a $15,000 underpayment, that penalty alone is $3,000.

Failure-to-Pay Penalty

If the additional tax isn’t paid by the original return’s due date, the IRS adds 0.5 percent of the unpaid balance per month, up to 25 percent total.¹⁴ With an active installment agreement, the rate drops to 0.25 percent per month.

Interest

Interest runs from the original due date of the return, not from when the audit ends. For the second quarter of 2026, the underpayment interest rate for individuals is 7 percent, calculated as the federal short-term rate plus three percentage points.¹⁵ It compounds daily.¹⁶ Interest also accrues on the penalties themselves, so a balance grows faster than a simple annual rate suggests.

Asking for Penalty Relief

Penalties are not always the final word. If a legitimate reason kept you from complying — a natural disaster destroyed your records, a professional gave you bad advice, an illness prevented timely filing — you can request abatement for reasonable cause. The test is whether you exercised ordinary business care and prudence and still couldn’t comply.¹⁷ You can ask before or after paying, in writing or verbally, and appeal a denial to the Independent Office of Appeals.

Paying What You Owe

The balance doesn’t have to be paid in one shot.

A short-term payment plan lets you clear the balance within 180 days with no setup fee. Interest and the failure-to-pay penalty keep accruing, but you skip the cost of a formal agreement.¹⁸

A long-term installment agreement spreads monthly payments over a longer period. The IRS charges a setup fee, and the failure-to-pay penalty falls to 0.25 percent per month while the agreement is active. While a request is pending, the IRS generally cannot levy your wages or bank accounts.¹⁸

The longer any balance sits, the more interest and penalties stack up. Even if you plan to appeal, paying the portion you don’t dispute can hold down the total cost.

If You Missed the Response Deadline

If the response window passed and the IRS already assessed tax using only what it had, you may still have a route back. Audit reconsideration allows the IRS to reopen a prior assessment if you have new information that wasn’t part of the original examination.¹⁹ It also applies when you never filed and the IRS prepared a substitute return; filing your actual return can trigger reconsideration of that substitute.

Reconsideration isn’t available in every case. If you signed a closing agreement, accepted a compromise, or paid the full assessment, other procedures apply. For taxpayers who simply didn’t respond in time because they moved, faced a medical crisis, or didn’t understand the notice, reconsideration can be a real option. Collection activity is generally paused while the request is under review.¹⁹

How Far Back the IRS Can Go

The IRS generally has three years from the date you filed a return to assess additional tax.²⁰ If you filed before April 15, the clock starts on the filing deadline itself.

Two exceptions extend that window. If you left out more than 25 percent of your gross income, the IRS has six years. If the return was fraudulent or was never filed, there is no time limit at all.²⁰

When an audit begins near the statute’s edge, the IRS may ask you to sign Form 872 to extend the assessment period. You are not required to agree, but refusing can prompt the IRS to issue a deficiency notice on incomplete information rather than give you time to make your case.²¹ If you do sign, ask for a fixed-date extension. An open-ended consent (Form 872-A) stays in force until one side sends a termination letter, which can leave the return exposed for years.

1
Taxpayer Advocate Service. Notification That Your Tax Return Is Being Examined or Audited
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Taxpayer Advocate Service. Lifecycle of a Tax Return – Correspondence Audits
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Internal Revenue Service. IRS Audits
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Internal Revenue Service. About Form 2848, Power of Attorney and Declaration of Representative
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Internal Revenue Service. Interim Guidance on Requesting Information and Documents From Taxpayers
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Internal Revenue Service. Taxpayer Bill of Rights
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Office of the Law Revision Counsel. 26 USC 7521 – Procedures Involving Taxpayer Interviews
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Internal Revenue Service. The Examination (Audit) Process
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Internal Revenue Service. Form 870 – Waiver of Restrictions on Assessment and Collection
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Internal Revenue Service. Preparing a Request for Appeals
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Taxpayer Advocate Service. Letter 525 – Audit Report Giving Taxpayer 30 Days to Respond
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Office of the Law Revision Counsel. 26 USC 6213 – Restrictions Applicable to Deficiencies; Petition to Tax Court
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Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
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Office of the Law Revision Counsel. 26 USC 6651 – Failure to File Tax Return or to Pay Tax
15
Internal Revenue Service. Internal Revenue Bulletin 2026-8
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Office of the Law Revision Counsel. 26 USC 6622 – Interest Compounded Daily
17
Internal Revenue Service. IRM 20.1.1 – Introduction and Penalty Relief
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Internal Revenue Service. Payment Plans – Installment Agreements
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Internal Revenue Service. IRM 4.13.1 – Examination Audit Reconsideration Process
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Office of the Law Revision Counsel. 26 USC 6501 – Limitations on Assessment and Collection
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Internal Revenue Service. Extending the Tax Assessment Period