An audit is a formal review of financial records to verify that the reported numbers are accurate and complete. The term covers a range of examinations, from a company’s own internal check of its books to an IRS look at your tax return, and the stakes shift with the setting. For most individuals, “audit” means the IRS, so that is where most of this guide sits.
The Main Kinds of Audits
Four types come up most often, and knowing which one you are dealing with tells you almost everything about what to expect.
An internal audit is run by a company’s own employees to check whether operations are efficient and whether staff are following policy. The findings go to management or the board’s audit committee, not to outside regulators.
An external audit is performed by an independent public accounting firm that reviews a company’s financial statements and issues a formal opinion. An unqualified opinion means the records fairly represent the company’s position; a qualified opinion flags specific issues that don’t undermine the overall picture; an adverse opinion signals that the statements are significantly misleading.1Public Company Accounting Oversight Board (PCAOB). AU Section 150 – Generally Accepted Auditing Standards Investors, lenders, and regulators use that opinion to judge whether they can trust the numbers.
An IRS tax audit is the agency examining your return to confirm that your reported income, deductions, and credits are correct. The IRS gets its authority to do this from Internal Revenue Code Section 7602, which lets it inspect books and records, summon witnesses, and take testimony under oath.2Office of the Law Revision Counsel. 26 USC 7602 – Examination of Books and Witnesses
A forensic audit is an investigation, not a routine check. It digs into records to find fraud, embezzlement, or other misconduct, usually after a specific allegation, and the evidence is often built for use in court or internal discipline.
Why the IRS Might Pick Your Return
Selection is not random. Most returns are scored by a computer program called the Discriminant Function System, which rates each one for how likely an examination is to produce a change in tax owed. A companion system, the Unreported Income DIF, focuses on the likelihood of unreported income. IRS staff then screen the highest-scoring returns and decide which ones actually get examined.3Internal Revenue Service. The Examination (Audit) Process
Returns are also flagged through information matching. When the income on your return doesn’t line up with the W-2s and 1099s the IRS receives from employers and financial institutions, that mismatch alone can trigger a review.3Internal Revenue Service. The Examination (Audit) Process Beyond the automated systems, certain patterns draw closer attention:
- Business deductions that look outsized next to reported income, especially home office write-offs, travel with no clear business purpose, and personal costs run through a business.
- Charitable donations that are large relative to income, particularly when documentation is thin.
- Refundable credits that are frequently claimed in error, such as the earned income credit, child tax credit, and education credits.
- Simple math errors. IRS computers check arithmetic automatically, and mistakes in adding deductions or moving numbers between forms can start correspondence.
Overall audit rates are low. For tax year 2019, individuals earning over $10 million were examined at an 11% rate, while filers earning $1 million to $5 million faced a 1.6% rate.4Internal Revenue Service. Compliance Presence Rates for filers below those income levels are considerably lower.
What an IRS Audit Actually Looks Like
The IRS conducts audits either by mail or through an in-person interview, and it will always contact you by mail first.5Internal Revenue Service. IRS Audits – Section: How Will the IRS Conduct My Audit? The format depends on the issues under review.
A correspondence audit is the most common and the least intrusive. The IRS sends a letter asking you to mail documentation for a specific item, such as a charitable deduction or a discrepancy with a 1099. You respond by mail and never meet anyone in person.
An office audit asks you or your representative to appear at a local IRS office with records for an in-person review. These involve more complex issues than a correspondence audit, often small business returns or rental income.
A field audit is the most intensive. A revenue agent comes to your home, business, or representative’s office to conduct an in-depth exam. Field audits typically involve businesses, high-net-worth individuals, or situations where the potential adjustment is large.
Length depends on complexity, how quickly requested documents show up, and whether you agree with the findings.5Internal Revenue Service. IRS Audits – Section: How Will the IRS Conduct My Audit? A straightforward mail audit can wrap in weeks. A field audit of a business with multiple entities can run for months.
How Far Back the IRS Can Go
The general statute of limitations is three years from the date you filed the return. After that, the IRS ordinarily cannot assess additional tax for that year.6Office of the Law Revision Counsel. 26 USC 6501 – Limitations on Assessment and Collection Important exceptions stretch that window:
- If you leave out more than 25% of the gross income shown on your return, the IRS gets six years.
- If the return is fraudulent, there is no time limit at all.6Office of the Law Revision Counsel. 26 USC 6501 – Limitations on Assessment and Collection
- If you never filed a return for a year, the clock never starts. The IRS can come after that tax at any time.6Office of the Law Revision Counsel. 26 USC 6501 – Limitations on Assessment and Collection
- The IRS may ask you to sign an agreement extending the assessment period. You can refuse, or limit the extension to specific issues or a specific time frame.6Office of the Law Revision Counsel. 26 USC 6501 – Limitations on Assessment and Collection
These deadlines are why the IRS recommends keeping most tax records for at least three years. Records for claims involving worthless securities should be kept for seven. Employment tax records should be kept at least four years after the tax becomes due or is paid, whichever is later. And if you never filed or filed a fraudulent return, keep everything indefinitely.7Internal Revenue Service. How Long Should I Keep Records
What the IRS Will Ask For
Preparation is mostly about organized records. Expect requests for financial ledgers, bank statements, receipts backing every deduction claimed, payroll records, and copies of the filed returns themselves.7Internal Revenue Service. How Long Should I Keep Records Business owners should be ready to export general ledgers and trial balances from their accounting software. The goal is a clean trail from an original transaction to the line where it lands on the return.
In office and field audits, the IRS makes those requests formally on Form 4564, the Information Document Request. The form lists the documents wanted, the periods they cover, and a deadline that typically runs 7 to 15 days depending on volume.8Internal Revenue Service. Form 4564 Information Document Request Treat every item as mandatory. The burden of proof falls on you to show that the deductions and credits you claimed are legitimate, and if you can’t produce evidence for a claimed expense, the auditor can disallow it outright.10Internal Revenue Service. Burden of Proof
How an Audit Ends
There are three possible outcomes:
Interest and Penalties If You Owe
If the audit shows you owe more, interest starts running and penalties can attach. For the first quarter of 2026, the IRS charges 7% annual interest on individual underpayments, compounded daily. Large corporate underpayments run at 9%.12Internal Revenue Service. Interest Rates Remain the Same for the First Quarter of 2026 Rates are reset quarterly.
On top of interest, the IRS can impose an accuracy-related penalty of 20% of the underpayment when the shortfall came from negligence, disregard of the rules, or a substantial understatement of income tax.13Internal Revenue Service. Accuracy-Related Penalty For individuals, a substantial understatement means the amount understated exceeds the greater of 10% of the tax that should have been shown or $5,000.14Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
The heaviest civil penalty is for fraud: 75% of the underpayment attributable to fraud. If the IRS shows that any portion was fraudulent, the entire underpayment is treated as fraud unless you prove otherwise by a preponderance of the evidence.15Office of the Law Revision Counsel. 26 USC 6663 – Imposition of Fraud Penalty The accuracy-related penalty and the fraud penalty cannot both apply to the same underpayment, so the IRS pursues whichever fits the conduct.14Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
Your Rights During the Audit
Taxpayers have a formal set of rights that apply throughout an audit, including the right to know the maximum time the IRS has to audit a particular year, the right to be told when the exam is finished, and the right to challenge the agency’s position.16Internal Revenue Service. Taxpayer Bill of Rights
You also have the right to representation. By filing Form 2848 (Power of Attorney and Declaration of Representative), you can authorize a qualified professional to handle the audit on your behalf, receive your confidential tax information, and deal directly with the IRS.17Internal Revenue Service. About Form 2848, Power of Attorney and Declaration of Representative Under Treasury Circular 230, the professionals eligible to represent you are attorneys, certified public accountants, and enrolled agents; enrolled actuaries and enrolled retirement plan agents can represent taxpayers on matters within their specialty.18Internal Revenue Service. Treasury Department Circular No. 230
If the IRS asks you to extend the statute of limitations during the audit, you can refuse or narrow the extension to specific issues or a specific window.6Office of the Law Revision Counsel. 26 USC 6501 – Limitations on Assessment and Collection The IRS is required to tell you about this right each time it asks. Signing a broad, open-ended extension is a common and avoidable mistake.
Appealing the Result
If you disagree with the auditor’s proposed changes, you don’t have to accept them or head straight to court. The IRS runs an internal appeals process designed to resolve disputes without litigation.
It starts with a 30-day letter, formally Letter 525, which comes with a report of the proposed adjustments. You have 30 days from the date of the letter to file a written protest with the IRS Independent Office of Appeals.19Internal Revenue Service. Letters and Notices Offering an Appeal Opportunity Appeals officers are independent from the examination division, so you’re making your case to someone who wasn’t part of the original audit.
If Appeals doesn’t resolve the dispute, the IRS issues a Notice of Deficiency, Letter 531, sometimes called a 90-day letter. That notice is your ticket to the United States Tax Court. You have 90 days from the mailing date to file a petition, or 150 days if the notice is addressed to you outside the country.20Taxpayer Advocate Service. Filing a Petition with the United States Tax Court If the deadline falls on a weekend or legal holiday, you have until the next business day. Miss it and you lose the ability to contest the deficiency in Tax Court before paying the tax, so mark the date the notice arrives.