Call for free Tax Review

Ways to Handle IRS Audits When Dealing with Unreported Income

Picture of Alisson Ward

Alisson Ward

Tax Professional | Content Writer

A professional tax advisor or lawyer sitting at a desk, engaged in a discussion with a client about an IRS audit related to unreported income. The advisor is holding IRS audit forms and explaining the audit process, while the client is reviewing financial documents and receipts. The desk is organized with tax-related paperwork, a laptop displaying IRS audit guidelines, and a bookshelf with legal books, indicating expertise and preparation for handling audits related to unreported income.

Facing an IRS audit is challenging enough, but when it involves unreported income, the stakes can be much higher. Unreported income can lead to serious consequences, but it’s essential to approach the situation correctly to mitigate potential issues. Here, we’ll discuss how to handle IRS audits when dealing with unreported income, what to expect, and the best practices to ensure a smooth and successful audit. 

Understand the Consequences of Unreported Income 

Unreported income, whether it’s intentional or due to oversight, can lead to various consequences. It’s important to understand the potential ramifications of unreported income before addressing an IRS audit. Consequences may include: 

  • Penalties: The IRS may impose penalties for underreporting income, and these penalties can vary depending on the severity of the discrepancy. 
  • Interest: Unreported income can result in additional interest on the unpaid tax amount. 
  • Back Taxes: You may be required to pay back taxes on the unreported income, along with penalties and interest. 
  • Legal Action: In cases of substantial unreported income or intentional evasion, legal action, including criminal charges, may be pursued. 
  • Reputation Damage: Accusations of unreported income can damage your reputation and professional relationships. 

Understanding the potential consequences can help you take the audit seriously and approach it with caution. 

Gather All Relevant Documentation 

When facing an IRS audit involving unreported income, it’s crucial to gather all relevant documentation. This includes all financial records, tax returns, income statements, bank statements, and any other documents related to the unreported income. The more comprehensive your documentation, the easier it will be to demonstrate your compliance and transparency. 

Additionally, gather any records that support the source of unreported income. This could include invoices, contracts, receipts, and other evidence that can help explain the origin of the unreported funds. 

Seek Professional Assistance 

Handling an IRS audit involving unreported income can be complex and stressful. Therefore, it’s advisable to seek professional assistance, such as a certified public accountant (CPA) or a tax attorney. These professionals have the expertise and experience to guide you through the process, ensuring that you address the audit correctly. 

A tax professional can provide the following services: 

  • Review your tax returns: A tax professional can review your tax returns and assess the extent of the unreported income. 
  • Advise on disclosure: They can advise you on how to disclose unreported income accurately and transparently. 
  • Represent you: A tax professional can represent you during interactions with the IRS and handle communication on your behalf. 
  • Negotiate and resolve: If discrepancies are identified, a tax professional can negotiate with the IRS to reach a resolution that is fair and favorable to you. 

Accurately Disclose Unreported Income 

During the audit, it’s essential to accurately and transparently disclose the unreported income to the IRS. This means providing complete information about the source of the income, the amount, and any documentation that supports your claims. 

Avoid attempting to hide or misrepresent the unreported income. The IRS is more likely to be understanding and willing to work with you if you are forthright and cooperative. 

Organize Your Documentation 

Properly organizing your documentation is crucial during an audit involving unreported income. Create a file or folder for all audit-related documents and ensure that they are well-organized and easy to access. This includes all correspondence with the IRS, copies of your tax return, supporting documentation, and any additional information requested during the audit. 

Having a well-organized file can help you respond to IRS inquiries more efficiently and demonstrate your commitment to cooperating with the audit. 

Stay Calm and Professional 

An IRS audit involving unreported income can be stressful, but it’s essential to stay calm and maintain a professional demeanor throughout the process. Be respectful and professional during interactions with IRS agents and other parties involved in the audit. 

Remember that the goal is to address the discrepancies and resolve the situation. Remaining professional and composed can help achieve a more positive outcome. 

Cooperate with the IRS 

Cooperation with the IRS is crucial when facing an audit involving unreported income. Respond to inquiries and requests promptly and provide any additional information or documentation as requested. Cooperating with the IRS demonstrates your commitment to addressing the audit accurately and transparently. 

If you need more time to gather information or prepare for the audit, contact the IRS as soon as possible to request an extension. Timely communication and cooperation can help avoid additional penalties or legal action. 

Review the Audit Findings 

After the audit is complete, the IRS will provide you with the findings, which may include proposed changes to your tax return and any additional taxes, penalties, or interest owed. It’s essential to carefully review the audit results and proposed changes. 

If you agree with the findings, follow the instructions provided by the IRS for resolving the discrepancies or paying any additional taxes owed. 

If you disagree with the findings or believe there are errors, you have the right to appeal. You can request an appeal through the IRS Office of Appeals. A tax professional can assist you in preparing your appeal and representing you during the process. 

Prevent Future Issues 

Once the audit is resolved, it’s crucial to take steps to prevent future issues related to unreported income. This may involve improving your record-keeping practices, ensuring accurate reporting on your tax returns, and seeking professional advice on tax matters. 

By addressing the root causes of unreported income and implementing better financial practices, you can minimize the risk of facing similar issues in the future. 


Handling an IRS audit involving unreported income is a challenging and potentially high-stakes situation. It’s essential to approach it with caution, transparency, and the assistance of a tax professional. By following the steps outlined Here, you can navigate the audit process with confidence and integrity, while working toward a resolution that is fair and favorable to you. 

Interested in tax relief?

Book your free consultation now
I acknowledge that by clicking “SUBMIT” I agree to be contacted via telemarketing calls and/or SMS/MMS text messages via telephone, mobile device and/or email. By doing so I waive any registration to any state, federal or corporate Do Not Call registry. I understand that calls to me and from me may be recorded for quality assurance purposes. I agree to receive approximately 10 messages every month and understand message & data rates may apply. Case results vary and are specific to each applicant qualifications. Call for complete details.
Get a free tax consultation:

Get a free tax consultation:

Do you have any unfiled tax returns?

Featured Posts:

Table of Contents

Need expert help? Looking to get back on track?

Share this post:

© 2024 All Rights Reserved.

*Priority Tax Relief (PTR) is a private company that identifies qualified consumers who require tax assistance. PTR is not a debt relief company. Costs and results will vary. Services are not available in all states. Check for service limitations and qualifications. RESULTS ARE NOT GUARANTEED. Hiring a tax resolution company is an important decision and should not be based solely on advertisements. PTR is not an attorney referral service. There is no charge for a consultation. Call for complete details

Book your free consultation

Book your free consultation

Do you have any unfiled tax returns?