IRS Income Tax Audit: What You Need to Know in 2025

Latest Facts and News

These are the latest IRS enforcement news and audit rates:

• Audit rates are up: Last year, the IRS audited high-income individuals at a rate higher than 50 percent.
• IRS workforce expansion: Thousands of new IRS agents have been employed with an emphasis on complex audits of both individuals and small businesses.
• AI-driven audits: The IRS has experienced a new wave of high-tech tools that can identify discrepancies and under-reported revenues more proficiently.
• Record-breaking recoveries: In FY 2024, the IRS closed 505,514 audits, recommending $29.0 billion in additional taxes.
• Focus on unreported income: More and more audits are as a result of unreported or understated income, particularly using the IRS’s new data-matching technology.

Did you know? The IRS recovered billions last year through audits. Learning how to avoid common mistakes and prepare for an IRS income tax audit can help you stay compliant and confident.

What Is an IRS Income Tax Audit?

When the IRS conducts an income tax audit, they examine your tax filings to verify compliance. This process ensures all income is reported and only eligible deductions are claimed. Audits assist in maintaining a fair tax system and collecting money due to mistakes or malpractices.

Types of Audits

The tax audit process can take several forms:

• Correspondence audits: The IRS may request that you provide documentation to support specific entries on your tax return, such as charitable contributions or business expenses.
• Office audits: This means going to a local IRS office for a closer review. Then, you will speak with an IRS agent and submit the required documents.
• Field audits: These are the most thorough kind, in which an IRS agent calls your place of business or residence and looks at the records in person.

For more details on audit assistance, check out Bowes and Sullivan Tax Group IRS audit help.

Common Triggers for an IRS Audit in 2025

Understanding what triggers an IRS audit can help you avoid mistakes:

High-Income Levels

The higher the income you have received, the greater the chances of you being audited. The IRS focuses on people earning high incomes, as their returns tend to be more complicated and more likely to have errors or understatements. Based on recent audit statistics, people making more than $400,000 are audited much more frequently, and the IRS intends to expand coverage to people making more than $10 million.

Unreported Income

The IRS compares the income you report with the information that employers, banks, and others report. If you leave out income, whether from a side gig, investments, or freelance work, you’re at risk for an IRS tax review. Digital currencies, such as cryptocurrency and offshore accounts, are increasingly becoming scrutinized.

Excessive Deductions

Taking large deductions that are more likely to be charitable deductions or business expenses is a red flags. In case you appear to pay high deductions in relation to the income you earn, the IRS might require evidence. In fact, you will face questions if you report $20,000 in charitable contributions against a $50,000 income.

Errors in Filing

Incorrect Social Security numbers, calculation errors, and other similar mistakes can lead to an audit. Cross-check the accuracy of your return to avoid errors before you put in your submission. The review may occur even after honest mistakes.

Pro tip: Use tax software or work with a professional to minimize mistakes and reduce your audit risk.

What Happens During an IRS Income Tax Audit?

Understanding the tax audit process can help you remain calm and organized if you are under IRS Tax Audit.

Notification Process

The IRS is always ready to give notice of an audit through mail. Always remain alert, as actual IRS audits do not come with a phone call or email. The letter will summarize what is under review and what record you will have to furnish. In case of any questionable call or email, make sure to contact the IRS directly to clarify the situation.

Information Requested

• Tax returns of the respective years
• Deduction receipts
• Bank statements
• Employment records (W-2s, 1099s)
• Business papers, in case this product is involved

The IRS may also request additional documentation if it finds inconsistencies during the review.

Resolution Process

After you submit your documents, the IRS reviews them and may ask for more information. You might need to attend a meeting or answer questions. Once the review is complete, the IRS will send you a report. If you agree with their findings, you’ll pay any additional tax or audit penalties. If not, you can appeal the decision.

How to Prepare for an IRS Income Tax Audit in 2025

Preparation is your best defense against stress and penalties.

Organizing Financial Records

Retain your tax documents, receipts, and bank statements in good order for at least three years. Good documentation should ease the process of responding to IRS inquiries and show that your assertions are true. Business owners most notably require maintenance of records, mileage records, and invoices.

Seeking Professional Assistance

The result can vary hugely depending on their experience. When facing an IRS income tax audit, particularly one involving business income or multiple years of returns, it’s highly advisable not to go through the process alone. A tax professional, such as a CPA or an enrolled agent, can provide invaluable assistance. They can clarify the necessary steps, communicate directly with the IRS, and negotiate on your behalf. 

Understanding Your Rights

You have important rights during an audit:

• Right to representation: You can have a tax professional represent you.
• Right to appeal: If you disagree with the audit outcome, you can appeal.
• Right to be informed: The IRS must explain what they’re reviewing and why.

For more on your rights, visit the IRS Taxpayer Bill of Rights

Consequences of an IRS Income Tax Audit

The results of an audit can range from no changes to significant penalties.

Penalties for Non-Compliance

Errors leading to back taxes, interest, and audit fees may be assessed against you if the IRS detects them. The prevailing penalty is 20 percent of any underpayment because of negligence or significant understatement. Cases of fraud that are serious can result in relatively higher sentences and even criminal offenses.

Impact on Future Tax Filings

In case you are audited, your subsequent returns will also be subjected to additional scrutiny. Your file might be singled out by the IRS in the next few years, particularly when your audit reduces or increases the liability on your taxes. To avoid repeated audits, maintain consistency in your filings and ensure careful record-keeping.

Real-World Example:
Suppose John is a little business owner who has been chosen to undergo a correspondence audit because he reported relatively large business expenses, given the size of the reported income. His deductions were put to the test because the IRS demanded receipts and bank statements. John had records that were well documented, and he worked with a tax professional so that he could submit all the documentation required. The audit ended with no modification to his tax liability.

This example highlights the importance of good recordkeeping and professional support.

How to Avoid an IRS Audit?

While you can’t guarantee you’ll never be audited, you can reduce your chances by:

• Reporting all income, including side jobs and investments
• Only claiming deductions that you can prove
• Double-checking your tax return for errors
• Filing electronically to reduce math mistakes
• Keeping thorough records for at least three years

If you’re unsure about a deduction or have a complex return, consult a tax professional.

Frequently Overlooked Audit Triggers

Some less obvious audit triggers include:

• Large cash transactions reported by banks or businesses
• Home office deductions that don’t match your business activity
• Claiming dependents who are also claimed on another return
• Frequent losses on rental properties or hobby activities

Being aware of these can help you avoid unnecessary attention from the IRS.

What to Do If You’re Audited

If you receive an audit notice, follow these simple steps and do not panic.

1. Read the notice carefully: Understand what the IRS is asking for.
2. Gather your records: Collect all requested documents and organize them.
3. Contact a tax professional: Get expert help, especially if the audit is complex.
4. Respond promptly: Meet all deadlines to avoid additional penalties.
5. Be honest: Never provide false or misleading information.

Conclusion

Navigating an IRS income tax audit can be stressful, but understanding the process helps you stay prepared. By keeping accurate records, knowing what triggers audits, and seeking professional help when needed, you can handle an IRS tax review with confidence. Staying proactive about income tax compliance is your best defense against costly mistakes and penalties.

Facing an IRS income tax audit? Bowes and Sullivan Tax Group is here to help. Visit our IRS audit assistance page or call 866-770-0670 for expert guidance.