What Happens When Your Taxes Are Audited | Know Your Rights and Options

Tax Terms Explained: What Happens When Your Taxes Are Audited 

What happens when your taxes are audited can feel overwhelming — but understanding the process puts you in control. The IRS conducts audits to verify that income, deductions, and credits reported on your return are accurate and supported by documentation. According to the IRS Data Book, the agency audits a small portion of all individual returns each year, with higher scrutiny applied to returns with significant deductions, unreported income, or business losses. In this guide, you will learn exactly what triggers an audit, how the audit process works step by step, and what tax relief options are available if the IRS finds a balance due.

Step-by-Step Tax: How the IRS Audit Process Works

When the IRS selects your return for examination, the process typically follows a defined sequence. Understanding each stage helps you respond properly and avoid common mistakes that increase your tax liability.

Step 1: IRS Notice — You receive a written notice by mail identifying which tax year is under review and what information the IRS is requesting. The IRS does not initiate audits by phone or email.

Step 2: Document Gathering — You must collect supporting records such as receipts, bank statements, W-2s, 1099s, and expense logs. The IRS generally looks back up to three years, though the window extends to six years if substantial underreporting is suspected.

Step 3: Response Submission — You respond to the IRS within the deadline stated in the notice. Missing this deadline can result in automatic tax assessments under IRC Section 6651.

Step 4: IRS Review and Determination — The IRS reviews your documentation and either closes the audit with no change, proposes adjustments, or requests additional information.

Step 5: Resolution — If you agree with the findings, you pay or arrange a payment plan. If you disagree, you can appeal through the IRS Office of Appeals or petition the U.S. Tax Court.

Options Compared: Tax Audit Resolution Strategies

What happens when your taxes are audited and the IRS proposes a balance due? You have several structured options to resolve the debt without facing enforced collection action.

Installment Agreement — Under IRC Section 6159, taxpayers who owe a tax balance may qualify for a monthly payment plan. This stops enforced collection while you pay the debt over time.

Offer in Compromise — The IRS may accept less than the full amount owed if you meet specific financial criteria under IRC Section 7122. The IRS accepted thousands of Offer in Compromise settlements in fiscal year 2023, recovering meaningful revenue while helping taxpayers resolve debts they could not fully pay (IRS Data Book, 2023).

Currently Not Collectible Status — If you cannot afford to pay and meet basic living expenses, the IRS may temporarily suspend collection activity. This provides critical relief while your financial situation is evaluated.

Innocent Spouse Relief — If your spouse or former spouse created the tax liability without your knowledge, you may qualify for relief under IRC Section 6015. This protection is critical for individuals who filed joint returns but were unaware of underreported income or fraudulent deductions.

Common Tax Challenges: What Triggers a Tax Audit

Knowing what increases audit risk helps you file more accurately and respond confidently if selected. The IRS uses automated scoring systems and data matching to flag returns for review.

Key IRS Concepts: Common Audit Triggers

Returns with unusually large charitable deductions relative to reported income, unreported income identified through third-party 1099 reporting, home office deductions claimed on Schedule C, and significant business losses reported across multiple years are among the most common audit triggers. 

Self-employed individuals and small business owners face heightened IRS scrutiny due to the complexity of deductible expenses and the potential for misreporting. According to IRS compliance research, the tax gap — the difference between taxes owed and taxes paid — runs into hundreds of billions of dollars annually, much of it attributed to underreporting by businesses and sole proprietors.

Proven Tax Solutions: Protect Yourself During and After an Audit

What happens when your taxes are audited depends heavily on how you respond. Taxpayers who engage a licensed tax attorney before responding to IRS notices consistently achieve better outcomes — including reduced penalties, negotiated settlements, and protection of appeal rights.

Under the Taxpayer Bill of Rights, you have the right to retain representation, the right to appeal IRS decisions, and the right to pay only the legally correct amount of tax. A tax debt attorney ensures these rights are exercised at every stage of the audit.

Get Help With What Happens When Your Taxes Are Audited

If you are facing an IRS audit or have received a tax bill following an examination, do not wait. An experienced tax debt attorney can review your case, protect your rights, and identify the fastest path to resolution. Start your free case review today. If you believe your spouse caused the tax debt, explore innocent spouse relief as a potential solution. Tax attorneys are also available to sign up and connect with clients through our network.

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