What to Do If You Receive an IRS Audit Notice

Tax Law · KVasquez Law, Brickell, Miami

Very few pieces of mail cause the reaction an IRS envelope does. The instinct is either to open it immediately and panic, or to put it in a drawer and deal with it later. Both are understandable and both make the situation worse than it needs to be.

An audit notice is the beginning of an examination, not a determination that you owe anything. What you do in the first two weeks tends to shape the entire outcome.

First, read what kind of notice it actually is

The IRS conducts examinations at three levels, and they are not equivalent.

• Correspondence audit. Conducted entirely by mail, usually narrow, often focused on one or two line items such as charitable deductions, business expenses or unreported income matched from a 1099. Most examinations fall into this category.
• Office audit. You are asked to appear at an IRS office with records. Broader in scope than correspondence and conducted by a tax compliance officer.
• Field audit. A revenue agent comes to your home, business or representative's office. These are the most comprehensive and typically involve business returns, complex transactions or significant amounts.

The notice itself will identify the tax year under examination, the specific items being questioned and a response deadline. Those three facts determine everything that follows.

Second, do not miss the deadline

Response deadlines in an IRS notice are real. Missing one does not usually end the matter, but it moves you from a position where you are presenting information to a position where you are contesting a determination already made against you. Those are very different postures with very different amounts of leverage.

If you cannot assemble what is requested in time, an extension is frequently available. It has to be requested, though. Silence is treated as non-cooperation.

Third, understand what you are actually required to give

You are required to substantiate the items being examined. You are not required to volunteer a general tour of your finances. An examination that begins with one deduction can expand if the responses invite it, and it is common for taxpayers to widen the scope of their own audit by over-answering.

Provide what is requested, completely and in an organised form. Answer the question asked rather than the question you assume is behind it.

Fourth, know the rights you have

The Taxpayer Bill of Rights is not decorative. Among other things you have the right to representation, the right to know why the IRS is asking for information, the right to appeal a determination in an independent forum, and the right to finality regarding how long the IRS has to examine a tax year.

The right to representation is the one people most often fail to exercise. You may have an attorney, CPA or enrolled agent deal with the IRS on your behalf, and once representation is on file the IRS is generally required to communicate through your representative rather than contacting you directly.

When an attorney matters more than an accountant

For a straightforward correspondence audit on a documented deduction, a competent CPA is often exactly the right person. The calculus changes in specific situations.

• When the numbers may not be defensible. If there is a real possibility that a return was materially wrong, the conversation you have about it should be privileged.
• When the examination touches multiple years or expands mid-course. Scope creep is a signal worth taking seriously.
• When the amounts are significant enough that appeals or litigation are realistic. The strategy at the examination stage should be built with the appeal in mind.
• When there is any indication of a fraud referral. This is the point at which the character of the matter changes entirely.

The distinction that matters is privilege. Communications with your attorney about your tax matter are protected. Communications with your accountant generally are not, and an accountant can be compelled to testify about what you told them. The federally authorised tax practitioner privilege is narrower than attorney-client privilege and does not apply in criminal matters.

What happens at the end

An examination closes in one of three ways. No change, meaning the return is accepted as filed. Agreed, meaning you accept the proposed adjustment. Or unagreed, meaning you disagree and the matter proceeds to the IRS Independent Office of Appeals or, ultimately, to Tax Court.

An unagreed outcome is not a failure. Appeals resolves a substantial share of disputes, and its mandate includes considering the hazards of litigation, which examination-level personnel are not permitted to weigh.

The practical summary

Open the letter. Identify the type of audit, the year and the deadline. Do not miss the deadline. Gather only what is requested and organise it properly. Get representation on file before you start talking. And do not assume that an audit means you did something wrong, because most of them do not.

This article is provided for general informational purposes only and does not constitute legal advice, nor does reading it create an attorney-client relationship with KVasquez Law. Tax and estate outcomes depend on your specific facts and on law that changes. Consult a qualified attorney about your circumstances before acting.