Introduction to IRS/State Income Tax Audits

What is an Income Tax Audit?
Why Are Some Income Tax Returns Audited?
How Are Audits Conducted?
What is the IRS/State Looking For?

What is an Income Tax Audit?

When the IRS or your state income tax authority contacts you via letter, notice or telephone call and asks you one or more questions about a tax return that you have filed, they are "auditing" you. In other words, you may not even be aware that you are being audited! Generally, the tax agency is evaluating whether you accurately reported how much money you made (your income); how much you spent (your expenses or deductions) and whether you qualify for, or properly computed, credits on your tax return. As part of this contact, the IRS or State tax authority may ask you about the records you used in preparing your tax return and they may ask to see those records, either requesting that you mail them copies or present them in an in-person meeting. This can be a very emotional, intrusive and invasive exercise, and to avoid worsening the economic consequences, you should handle an audit with due care.

Handling a tax audit yourself is like going to court without a lawyer. That "nice" engaging IRS agent sitting across the table from you, or on the other end of the telephone, will be asking you very innocent sounding questions. They generally ask about 54 interview questions. How you answer them will dictate in which direction the audit will proceed. The IRS uses these questions to build their case against you. They want you to incriminate yourself. The IRS is focused on one thing: to assess and collect taxes from you. Period.

Did you know that nearly half of the referrals to the IRS's criminal investigation division (CID) come from that "nice" person handling your examination?

Why Are Some Income Tax Returns Audited?

The IRS accepts most tax returns as filed. However, the IRS audits/questions some returns to determine if income, expenses and credits are being reported accurately. If your tax return is selected for audit, it does not mean that you made an error or are dishonest. Returns are audited for a variety of reasons:

  • Your tax return is selected randomly
  • You made a math error on your tax return
  • Your W-2s 1099's, etc., filed by employers and people with whom you do business do not match what you reported on your tax return
  • Your deductions and credits, that you reported, appear unusual based on statistical averages of other taxpayers similar to your income level, also called the "DIF" score
  • Your return may be selected as a result of information received from other sources, including newspapers, public records, an ex-spouse or spurned business partner.

How Are Audits Conducted?

The audit may take place in any of several ways:

  • Correspondence audits through the mail (most common method)
  • At an IRS field office
  • At your home or place of business (these are very complex and involved)
  • The IRS, in its investigation, can also contact third parties, such as your neighbors, banks, employers, or employees and ask questions about you.
  • It is crucial that you respond timely to any IRS correspondence in order to avoid additional amounts due and aggressive collection tactics.
  • The IRS is a very special creditor that has very broad, and in some cases, unbridled power to gather information, assess and collect tax. However, as a United States taxpayer, you have rights. A lot of them. But that is why it is critical that you have expert professional representation to protect and preserve those rights and vigorously defend you before the IRS. That's what we do, day-in, day-out, for a living.

What is the IRS/State Looking For?


  • The IRS wants to make sure you reported all sources and amounts of income you received generally from bank deposit records; and prove your expenses and deductions with receipts, canceled checks, credit card statements and the like.
  • If the IRS finds that you deposited or received more money than you reported, or that your expenses were less than reported, they will recompute the amount of tax you owe, adding interest and penalties on the amount you did not pay, if applicable.
  • If the error/adjustment is large enough compared to what you originally reported, the IRS can assess a civil fraud penalty that is 75% of the additional tax for which they are proposing to bill you!
  • If you underreported your income by 25% or more in the year under examination, the IRS may audit you for the last six years.
  • The IRS is also looking for "badges of Fraud". If they "think" that you committed fraud they will refer your audit to the Criminal Investigation Division ("CID") of the IRS!

We can help!

If you think any of your current or past income tax returns may be in any of these categories or the IRS has already contacted you with intent to audit you, we can help. Learn more about our Audit Defense Services.