Self-employed individuals enjoy flexibility and independence, but they also face unique tax responsibilities. Because self-employed income is reported differently from traditional W-2 earnings, the IRS may scrutinize tax returns more closely, increasing the likelihood of an audit.

If you receive an audit notice, don’t panic. With proper preparation, you can navigate the process smoothly. This guide covers why self-employed individuals get audited, what to expect, and how to prepare.

The IRS selects tax returns for audit based on:

📌 Tip: Use accurate records and avoid overly aggressive deductions to reduce audit risk.

There are three types of IRS audits:

1️⃣ Correspondence Audit – The IRS requests additional documentation by mail (the most common and least invasive type).
2️⃣ Office Audit – You meet with an IRS agent at an IRS office to provide records and answer questions.
3️⃣ Field Audit – An IRS auditor visits your home or business to review financial records in detail.

📌 Tip: Most audits start as correspondence audits, so responding quickly with the correct documentation can resolve issues early.

🔹 Read the audit letter to understand which tax year and which items the IRS is questioning.
🔹 The notice will outline what documents are required and the deadline for response.

The IRS may request proof of income, deductions, and expenses, so prepare:
✔ Income Records – 1099-NEC, 1099-K, bank statements, invoices, and payment receipts.
✔ Business Expense Records – Receipts, invoices, and credit card statements for deductible expenses.
✔ Mileage Log – If you claimed vehicle expenses, provide a detailed mileage log.
✔ Home Office Documentation – Floor plan, utility bills, and lease/mortgage documents.
✔ Tax Returns & Supporting Documents – Prior tax returns, estimated tax payments, and relevant worksheets.

📌 Tip: Keep at least three years of tax records since the IRS typically audits up to three years back (or six if fraud is suspected).

🔹 Ensure all reported income matches your bank deposits and 1099 forms.
🔹 Double-check deductions for business-related expenses only.
🔹 Ensure no personal expenses were mixed with business deductions.

📌 Tip: If you made an honest mistake, the IRS allows you to amend your tax return.

If the audit is complex, consider:
✅ A CPA or Enrolled Agent (EA) – Helps prepare records and negotiate with the IRS.
✅ A Tax Attorney – Useful if there’s potential for legal consequences.

📌 Tip: If you have a tax professional who prepared your return, they can represent you in the audit.

🔹 Provide only the documents requested—nothing extra.
🔹 Respond before the deadline to avoid penalties or additional scrutiny.
🔹 Keep copies of all documents submitted.

📌 Tip: Be professional and cooperative—arguing or providing excessive information can complicate the process.

✔ No Changes – If your records support your tax return, no adjustments are made.
✔ Additional Taxes Owed – If the IRS finds discrepancies, you may owe additional taxes, penalties, and interest.
✔ Refund or Overpayment – If the IRS finds an error in your favor, you may receive a refund.

If you disagree with the audit results, you can appeal the decision or negotiate a payment plan if taxes are owed.

An IRS audit can be stressful, but proper documentation and preparation will help you navigate it successfully. Keep detailed financial records, file accurate tax returns, and consult a tax professional when needed.

By staying organized and compliant, self-employed individuals can minimize audit risks and handle any IRS inquiries with confidence.