What Happens During a Tax Audit and How to Prepare

Seeing a letter from a tax authority in your mailbox can make your heart skip a beat. Whether it is the IRS in the United States, HMRC in the UK, or another global revenue service, the word "audit" carries a heavy reputation. For international travelers, digital nomads, and expats, that anxiety can be even higher. When your life is spread across borders, proving where you live and where you owe taxes feels like a daunting task.

The good news is that an audit is rarely as dramatic as it looks in the movies. It is strictly a business transaction to verify that the numbers on your return match reality.

By understanding the process and keeping the right records, you can handle a tax inquiry with confidence. Here is a look at what actually happens during a tax audit and how you can prepare yourself before the letter ever arrives.

Why Do Audits Happen?

The first step in lowering your stress levels is realizing that being selected for an audit does not necessarily mean you have done something illegal. While some audits are triggered by suspicious activity, many are simply the result of statistical formulas or random selection.

Here are a few common reasons a tax authority might flag a return for review:

• Mathematical errors: Simple calculation mistakes are the most common trigger.
• Missing information: If you forgot to report a specific 1099 form or investment income that the government already has a record of, the system will flag the discrepancy.
• High deductions: If your business expenses or charitable donations are significantly higher than the average for your income bracket, it may prompt a closer look.
• Foreign income and residency: For the Days Monitor community, this is the big one. If you claim foreign tax credits, exclude income based on the Foreign Earned Income Exclusion, or claim non-residency status, authorities may want to verify that you were actually out of the country for the required amount of time.

The Notification Phase

You will almost always be notified of an audit by mail. Tax authorities generally do not initiate audits via telephone, text message, or email. If you receive a digital message demanding immediate payment, it is likely a scam.

The official letter will clearly state that your return has been selected for examination. It will specify which year is being reviewed and exactly what the auditor is looking for. They might just want to verify one specific deduction, or they might want a broader look at your financial situation.

What to do immediately: Do not ignore the letter. There is usually a deadline to respond. Read it carefully to understand the scope of the request. If you used a CPA or tax professional to file your return, contact them immediately. They can often handle the communication on your behalf.

What Actually Happens During the Review?

There are generally two types of audits, and understanding the difference helps you know what to expect.

The Correspondence Audit

This is the most common and least intrusive type. The tax authority simply needs written verification for a specific part of your return. For example, they might ask for receipts to prove your travel expenses or documentation regarding your charitable contributions. You mail or upload the requested documents, the auditor reviews them, and if everything checks out, the case is closed.

The Field or Office Audit

This is more in-depth. In an office audit, you go to a local tax office. In a field audit, an agent comes to your home or place of business. While this sounds intimidating, the goal remains the same. They want to verify facts.

During the meeting, the auditor will ask questions about your business operations or lifestyle to understand how your finances work. They will review the records you provide to see if they substantiate the numbers on your tax return.

The outcome: An audit generally ends in one of three ways: 1. No change: You substantiated everything, and you owe nothing. 2. Agreed: The auditor found errors, you agree with their findings, and you pay the additional tax (plus interest and potentially penalties). 3. Disagreed: You do not agree with the findings and choose to appeal the decision.

The Global Traveler’s Burden: Proving Your Presence

For digital nomads and frequent flyers, an audit often focuses on time rather than just money.

Many tax advantages rely on strict day-counting rules. For example, the United States uses the Substantial Presence Test to determine if a non-citizen is a resident for tax purposes. Conversely, US citizens abroad utilize the Physical Presence Test to qualify for income exclusions.

If you are audited regarding your residency status, the burden of proof is on you. The auditor will not just take your word for it that you were in Bali and not Boston. You need to prove exactly where you were on specific dates.

If you need to verify your current status regarding US tax rules, you can use our free USA substantial presence calculator to see where you stand.

Common evidence requested includes: * Flight itineraries and boarding passes. * Passport stamps (though these are becoming rarer digitally). * Credit card statements showing transactions in foreign currencies. * Utility bills or lease agreements.

How to Prepare (and Stay Prepared)

The best defense against an audit is organization. If you wait until you receive a letter to start gathering documents, you are setting yourself up for a panic-filled experience.

1. Digitize Everything

Receipts fade and paper gets lost, especially when you are moving between countries. Use a scanner app or cloud storage to save copies of every expense receipt, bank statement, and travel document immediately. Create a folder for each tax year.

2. Track Your Days Automatically

Memory is fallible. Trying to reconstruct your travel history from three years ago is nearly impossible without a log. Tax authorities expect precise dates.

This is why we built Days Monitor. It acts as a discreet background companion that automatically logs which country you are in. If an auditor asks for proof of your physical presence during a specific tax year, you can generate a report that shows exactly when you entered and exited different jurisdictions.

3. Keep Personal and Business Separate

If you are a freelancer or business owner, never mix personal funds with business funds. Having a dedicated business bank account and credit card makes it much harder for an auditor to question which expenses were personal and which were professional.

4. Know Your "Red Lines"

Every country has different thresholds for tax residency. It might be 183 days in the UK, or a more complex calculation in the Schengen Area. Being aware of these limits prevents accidental overstays that trigger tax liabilities. If you are traveling through Europe, our free Schengen monitor is a great tool to ensure you remain compliant with visa rules, which often overlap with tax considerations.

Conclusion

A tax audit is essentially a request for proof. It is the government asking, "Can you show us evidence that what you said is true?"

When you have the evidence ready, the fear dissipates. The process becomes a matter of handing over the correct files rather than scrambling to find lost paperwork. For the modern traveler, this means treating your location data with the same importance as your financial data.

By staying organized, keeping clear records of your income, and accurately tracking your time spent in each country, you protect your lifestyle and your peace of mind.

Ready to take the guesswork out of your travel history? Download the Days Monitor app today to automatically track your tax residency days and travel history, ensuring you are always prepared.