When you get audited, the IRS gives you an advance notice. If you’re selected for audit in one of these situations, you’ll know about it several weeks before the scheduled appointment time. You can see the guidelines for how long audits take in the IRS Manual.
The audit team will send you a letter (or an email) with details about your appointment and instructions on how to prepare for it. If your Schedule C has red flags, like hobbyist activities or other problems that set off the audit sensors, they might ask you some questions as part of their initial screening process. That doesn’t mean they think you did anything wrong; most businesses just require a little more scrutiny than others. The audit itself consists of an interview and a few tests to see if your business is organized correctly and follows specific guidelines for deductions and other factors. Here’s what to expect from the process as well as how long it will take from start to finish.
What to Expect During an IRS Audit
Audits are very thorough. The auditor will look at anything that might be off, including your records, deductions, and classification of employees. Expect to answer questions about business expenses, income, assets, and cash flow. They might also have you prepare a revised Schedule C with their suggestions. If you reported income incorrectly, they’ll adjust your return. If you reported too little income, they might ask you to pay additional taxes. If you reported income or expenses incorrectly, they might advise you on how to fix the problem. If you used incorrect methods to report income or expenses, they might ask you to pay additional taxes and penalties.
What to do before your appointment
The IRS gives taxpayers three opportunities to “correct the problem” before assessing additional taxes and penalties. If you accidentally underreported your income or overstated your expenses, you can either file an amended return, pay any additional taxes you owe, or both. Your best strategy is usually to file an amended return and explain why you reported the information incorrectly. If you should have paid taxes but didn’t, you can pay the difference.
The length of IRS audits
Most audits take four to six weeks from the time the auditors receive your records until they close the case. If you reported income incorrectly, they might give you an opportunity to fix it. If you reported too little income, they might ask you to pay additional taxes. If you reported too much income, they might advise you on how to fix the problem. If you used incorrect methods to report income or expenses, they might ask you to pay additional taxes and penalties. When you report too little income — or report too much income — you’re termed “non-fault” and the audit process is much quicker because the IRS doesn’t have to spend time investigating or substantiating your records.
Your appointment: Meeting with the auditor
The initial meeting with the auditor is usually brief — 10 to 15 minutes. The auditor will ask you a few questions to get an overview of your business and review the information you gave them in advance. They will ask you to explain any unusual items or “red flags” that show up in your records. After the initial meeting, the auditor will examine your business records in detail. Depending on how thorough the audit is, this could take a few days or weeks.
Your appointment: Examining your books
The auditor will look for inaccuracies and red flags in your books. Depending on the level of scrutiny and the thoroughness of your records, this might take a few days or a few weeks. The auditor might also want to talk with some of your employees. If the audit involves employment taxes, the auditor might talk with your employees.
After the audit: Responding to the findings
If you reported income incorrectly, they might give you an opportunity to fix it. If you reported too little income, they might ask you to pay additional taxes. If you reported too much income, they might advise you on how to fix the problem. If you used incorrect methods to report income or expenses, they might ask you to pay additional taxes and penalties. If the audit ends with a “no change” decision, you’ll receive a letter informing you that they found no errors in your records and that you owe no additional taxes. That doesn’t mean you’re in the clear. You’ll still have to file all the appropriate forms and follow the same rules as everyone else, so make sure you continue to keep accurate records.
The IRS audits a relatively small percentage of all taxpayers each year — about 1%. So, the odds are that you’ll never be audited. If you do get audited, it’s likely because you reported problematic income or expenses. If that happens, don’t panic. Just follow the audit process, keep accurate records, and you’ll come out of it okay.