The word "audit" is enough to make most taxpayers uneasy. But much of that anxiety comes from not knowing what the process actually involves. An IRS audit is not a criminal investigation. It is a review of your return to verify that your reported income, deductions, and credits are accurate. Understanding how it works — what triggers it, what it looks like in practice, and what rights you have — puts you in a significantly stronger position from the start.
How Audits Are Selected
The IRS selects returns for audit through several methods. Computer algorithms compare your return against statistical norms for taxpayers in similar situations — a system called the Discriminant Inventory Function (DIF) score — and significant deviations flag your return for review. For example, if your claimed business deductions are far higher as a percentage of income than typical for your industry, the algorithm may flag the return. Related examinations also trigger audits: if a business partner, investor, or employer is being audited, your return may be pulled as well because the IRS follows income across related parties. Random selection, while less common, also plays a role. Being selected does not mean the IRS believes you did anything wrong — it means your return met a criterion that warranted a closer look.
Certain items are historically more likely to attract IRS attention: home office deductions, large charitable contributions, unusually high business meal and entertainment expenses, significant cash transactions, and Schedule C losses that consistently offset other income year after year. This does not mean you should avoid legitimate deductions — it means you should maintain thorough documentation for every item you claim.
Types of IRS Audits
There are three primary types. A correspondence audit is the most common and is conducted entirely by mail. The IRS asks you to provide documentation supporting specific items on your return — typically a letter requesting receipts, bank statements, or proof of a particular deduction. These audits are manageable when you have organized records, but the written format means every response must be precise and complete; there is no opportunity for real-time clarification.
An office audit requires you to appear at a local IRS office — for South Jersey taxpayers, this might mean the IRS Taxpayer Assistance Center in Philadelphia — with records related to certain line items. These audits are more involved than correspondence audits and often cover multiple issues simultaneously. A field audit, the most comprehensive type, involves an IRS revenue agent visiting your home or place of business to review your books and records in detail. Field audits are typically reserved for businesses and more complex returns, and the examiner has broad latitude to request documentation across multiple years.
What the IRS Examines
The scope of an audit depends on what triggered it. The IRS may focus on a single issue, such as a charitable deduction or business expense, or it may examine multiple areas of your return. You are required to provide only the documentation the IRS specifically requests. Volunteering additional information beyond what is asked can expand the scope of the examination unnecessarily — a mistake that representation specialists see frequently when taxpayers try to handle audits on their own.
Documentation that the IRS commonly requests includes bank statements, receipts, mileage logs, lease agreements, contractor invoices, charitable donation acknowledgment letters, and any third-party records that corroborate items on your return. New Jersey taxpayers with pass-through business income may also need to provide state-level records if a related NJ Division of Taxation inquiry follows the federal audit.
Real-World Scenario
A Collingswood small business owner received a correspondence audit notice requesting documentation for $18,000 in Schedule C vehicle and home office deductions. He had claimed a home office deduction for several years and used his personal vehicle for business deliveries. Without a contemporaneous mileage log or clear documentation separating personal and business vehicle use, the IRS disallowed a significant portion of both deductions. The resulting deficiency — after the IRS recalculated his business income — was approximately $4,100 in additional tax plus accuracy-related penalties. A structured recordkeeping system and a detailed mileage log maintained throughout the year would have fully supported his original deductions.
Your Rights During an Audit
Taxpayers have the right to professional representation during an audit. You do not have to face the IRS alone, and in most cases, you should not. An Enrolled Agent or other authorized representative can handle all communication with the examiner, attend meetings on your behalf, and negotiate findings before they become final. Critically, your representative can limit the scope of the examination — ensuring the auditor does not stray beyond the issues that triggered the review in the first place.
You also have the right to appeal the audit results if you disagree with the outcome. The IRS Independent Office of Appeals provides a forum to dispute audit findings before they become final assessments, and that process can result in a significantly reduced liability or a full reversal. If Appeals does not resolve the issue, you retain the right to petition the U.S. Tax Court.
HofflerSmith Tax Advisory represents clients through every stage of the IRS audit process. From the initial response letter to the closing conference, we manage the communication so you can focus on your life and business rather than stacks of IRS paperwork.
Frequently Asked Questions
Q: How far back can the IRS audit my returns?
A: The standard statute of limitations is three years from the filing date. However, if the IRS believes you substantially underreported income (by more than 25 percent of gross income), the window extends to six years. There is no statute of limitations if the IRS believes a return was fraudulent.
Q: What if I do not have all the records the IRS is requesting?
A: Reconstructing records is possible and sometimes necessary. Bank statements, credit card records, and third-party documentation can often substitute for lost receipts. A representation specialist can help you build the strongest possible response using the documentation that does exist.
Q: Can the IRS audit the same return twice?
A: Generally, no. The IRS policy (Revenue Procedure 85-13) prohibits re-examining a return that was already audited unless unusual circumstances exist, such as new evidence of fraud. However, related returns for different years are not protected by this policy.
If you have received an audit notice, do not wait. Contact our office as soon as possible so we can review the scope and begin preparing your response.
Dealing with an IRS problem? Call HofflerSmith Tax Advisory at (856) 740-4912.
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