1. The simplest is the correspondence audit. You will get a letter from the IRS requesting that additional information be mailed to them or that a proposed additional amount of tax be sent in.

2. The second level of audit is the office audit. You will be asked to bring certain information to the IRS office for review.

3. The most complete audits are called field audits. They are conducted at your place of business. It is best to avoid these if possible. Once the agent is at your place, he or she has much more to see and ask about.

Red Flags

The Internal Revenue Service is interested in auditing returns which are most likely to produce additional revenue. The Service has developed averages for certain returns which it feels have the best audit potential. Here is a list of some of the items which draw attention to your tax return:

Returns which are filed without the necessary supporting tax return schedules.
Business losses several years in a row.
Businesses run by a single family, especially those reporting on Schedule C, since they often make all the decisions and do their own recordkeeping.
Big deductions for business travel and entertainment expenses.
Deductions for automobile expenses.
Noncash charitable contribution deductions.
High mortgage interest deduction and low income.
Deductions for "independent contractors" (versus employees) on business returns.
Your occupation if you are in a business which is often paid in cash, such as taxicab driver, hairdresser, or waitress.
A major change in your income compared to your prior tax returns.
Returns claiming a home office deduction.
Low S corporation shareholder salaries in relation to other distributions.
Early withdrawal from an IRA account which is not rolled into a new account or reported on your tax return.
Sloppy tax return preparation.

This is only a partial list. There are different red flags for different industries, professions, and income levels. The IRS is constantly changing what it uses as audit indicators.

Document Matching

If you fail to report income on your tax return which was reported to the IRS on a document (such as an interest statement from your bank), the audit adjustment is all but automatic. If you receive interest, brokerage statements, or other information returns with the wrong amounts, try to get a corrected copy. If you can't get a corrected copy, include your explanation with your return as to why you are reporting a different number on your return.

What To Do If You Receive an Audit Notice

If you receive a notice from the IRS, don't ignore it. All contacts by the IRS should be handled promptly. Unless you are an accomplished IRS "fighter," you would be wise to seek professional assistance from the very first correspondence.