An IRS envelope does not mean an agent is coming to your kitchen table. Most examinations are a letter asking you to prove one line on one return. An audit does not ask whether you are honest, only whether you can show the paper, and that work happened long before the letter arrived.
An Audit Is a Documentation Request
The IRS calls it an examination. What it does is ask you to support numbers you already reported. Nobody is accusing you of anything by opening one, and plenty close with the return unchanged.
An examination always starts with a letter, never a phone call, a text or an email, which is worth knowing because scammers claiming to be the IRS do exactly that. The letter names the tax year, the items in question, and what to send.
Audit rates are low and have fallen a long way over two decades. They are also not spread evenly. The IRS's own Data Book statistics show coverage concentrated at the ends of the income range: very high income returns, and returns claiming the Earned Income Tax Credit. The broad middle sits well below both.
The Three Kinds of Examination
A correspondence examination is conducted entirely by mail. A tax examiner at an IRS campus asks for records on one or two items, you send them in, and the file closes. In recent Data Book years these ran around four in five of all individual audits.
An office examination asks you to bring records to an IRS office and sit with a tax compliance officer. It covers more ground than a letter audit, usually because several items on the return are in question.
A field examination is the one people picture. A revenue agent, the most senior of the three, comes to your business, or to a representative's office instead of your home. Field exams go to returns with real complexity: operating businesses, partnerships, high income individuals.
How Your Return Got Picked
The discriminant function, or DIF, scores every filed return against statistical norms built from the results of past audits. A high score triggers nothing by itself. It routes the return to a human classifier, who decides whether there is really an issue worth working.
Document matching compares your return against the information returns third parties filed about you: W-2s, the various 1099s, brokerage forms. A mismatch generates an automated notice, usually a CP2000. That notice is not formally an examination, but it arrives as a letter proposing more tax.
Related examinations pull you in through someone else. If a partnership or a business you transacted with is under audit, the agent can open your return because the numbers connect.
National Research Program selection is random. The IRS audits a statistical sample of returns to measure compliance, and those results are what keep the DIF formula current. It is a thorough audit, and nothing on your return caused it.
How Far Back the IRS Can Reach
The general assessment window is three years from the date you filed or the return's due date, whichever is later. After that, the IRS generally cannot assess more tax for the year.
Two extensions matter. If you omit more than 25 percent of the gross income you reported, the window doubles to six years. Since 2015 that includes income understated by overstating your basis in property you sold.
Two situations have no time limit at all. If you never filed for a year, the clock never starts, so that year stays open forever. The same is true of a return the IRS can prove was false or fraudulent with intent to evade tax. Filing something imperfect starts a clock. Filing nothing does not.
The Burden of Proof Sits With You
A deduction is something Congress grants, and whoever claims it has to show they qualify. That is the default rule, and it shapes how an audit feels. The IRS does not have to disprove your expense. You have to prove it.
A provision can shift the burden to the IRS, but read what it requires: you kept the records the law asks for, met the substantiation rules, and cooperated. The shift is only available to people who did not need it.
For four categories the law is stricter. Travel, meals, gifts and vehicles need records made at or near the time of the expense. Courts may approximate some deductions from imperfect evidence, but never these. No log means no deduction, however real the driving was.
Contemporaneous is the operative word. A record written the day it happened is evidence. A spreadsheet reconstructed the week the letter arrives is a story.
What Good Schedule C Records Look Like
Schedule C is where a sole proprietor reports business profit. Substantiating one comes down to a few habits.
Keep a separate business checking account and card. Nothing requires it, but it turns proving anything into a sorting job instead of an excavation.
For each expense, capture the amount, the date, the place and the business purpose, plus, for a meal, who was there and your relationship to them. A card statement shows amount and payee and nothing else, so it is not a receipt.
For a vehicle, keep a mileage log with the date, destination, business purpose and miles for each trip. A phone app that logs trips works if you tag the purpose at the time.
An examiner can also reconstruct income from bank deposits, so note gifts, transfers between your own accounts and loan proceeds as they land.
Keep all of it at least three years past filing. For anything you depreciate, keep the purchase records until three years after you sell it, since the basis is what proves the gain.
The Categories That Draw Scrutiny
Vehicle use is first. Claiming 100 percent business use of the only car in a one-car household invites a question, and commuting to a regular workplace is never deductible.
The home office deduction requires exclusive and regular use of a space as your principal place of business. A spare room qualifies; the dining table does not, because you eat there. The simplified option is $5 per square foot up to 300 square feet, so $1,500 at most. Employees cannot claim it at all.
Meals and travel draw attention because the personal version of each sits so close to the business version. Business meals are generally half deductible. Entertainment has not been deductible since 2018. A trip has to be primarily for business.
Charitable deductions that are large relative to income get looked at. Any single gift of $250 or more needs a written acknowledgment from the charity, obtained before you file. Noncash gifts above $500 need Form 8283, and above $5,000 a qualified appraisal.
Then there is the business that loses money every year. Section 183, the hobby loss rule, asks whether you run it to make a profit. Show a profit in three of five consecutive years and you get a presumption in your favor. Fail it and you carry the argument, judged on things like whether you keep real records and change tactics after losses. Since 2018 a hobby's expenses are not deductible at all.
Three Ways It Ends, and What Comes After
An examination closes as a no change, an agreed adjustment, or a disagreement. Agreeing means signing Form 4549 and paying the tax plus interest from the original due date, sometimes with an accuracy-related penalty of 20 percent for negligence or a substantial understatement.
Disagree and you get a 30-day letter: the examination report, plus 30 days to request the IRS Independent Office of Appeals. Appeals is staffed separately from the examiners and can settle on the odds the government would lose in court. The request is a written protest, or a short statement if the amount for the period is $25,000 or less.
Let the 30 days pass, or leave Appeals unresolved, and the IRS issues a statutory notice of deficiency, the 90-day letter. You have 90 days from its mailing date, 150 if it is addressed to you outside the United States, to petition the United States Tax Court. Miss it and the court cannot hear the case at all. Tax Court is the one forum where you can contest the tax before paying. Cases of $50,000 or less per year can use a small case procedure, less formal but with no right to appeal the decision.
Through all of it you can be represented by an attorney, a CPA or an enrolled agent, the three credentials with unlimited practice rights before the IRS. Form 2848 authorizes them. Ask to consult a representative during an interview and the examiner generally has to suspend it, and you need not attend unless formally summoned. Low Income Taxpayer Clinics represent people under an income threshold for free or near it.
