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IRS Examination
Answer the question the IRS asked. Only that question.
Most audits begin narrow: one year, a few line items. They widen when the answers raise new questions. Representation is mostly the discipline of proving what was asked and nothing more.
An IRS audit is an examination of whether the items on a return are correct. It is conducted by mail, at an IRS office, or in the field at your home or business. The IRS generally has three years from filing to assess more tax, six years if more than 25 percent of gross income was omitted, and no limit for fraud or an unfiled return. If you disagree with the result, a 30-day letter gives you the right to go to the IRS Independent Office of Appeals. If that fails or is skipped, a notice of deficiency gives you 90 days to petition the Tax Court.
The three kinds of audit
- Correspondence audit. A letter asks you to mail support for specific items, often credits, dependents, or a Schedule C expense. Most audits are this kind. They are run by campus staff who never meet you, and deadlines are enforced by computer.
- Office audit. You, or your representative, meet an examiner at an IRS office with the records listed in the appointment letter.
- Field audit. A revenue agent examines a business or a complex return at your premises or your representative's office. These are the broadest, and the agent will tour the business, interview the owner, and analyze bank deposits.
The deadline
Every audit letter and every Information Document Request carries a response date. Missing it in a correspondence audit produces a proposed assessment by default, followed by a notice of deficiency. Extensions are routinely granted when requested before the date passes.
The IRS works against its own clock too. When the three-year period is running out, the agent will ask you to sign Form 872 extending it. You may refuse, agree, or agree only for limited issues or a limited time. Refusing usually produces an immediate notice of deficiency based on whatever the agent has, so the choice is tactical.
How audits end
- No change. The return is accepted as filed.
- Agreed. You sign the examination report and the tax is assessed.
- Unagreed. The IRS issues a 30-day letter with the examination report. A written protest within 30 days sends the case to the Independent Office of Appeals, which can settle based on the hazards of litigation. If no protest is filed, the notice of deficiency follows.
What happens if you ignore it
The examiner disallows everything that was questioned, adds a 20 percent accuracy penalty, and the case proceeds to a notice of deficiency and assessment. If that has already happened, audit reconsideration lets you present the documents you never submitted, though it is discretionary and slower than answering the audit would have been.
When a lawyer matters
When the return has a problem you already know about. Unreported income, personal expenses run through a business, or inflated deductions turn a civil audit into a potential fraud referral, and agents are trained to notice the signs. What you tell an attorney about those facts is privileged. What you tell a return preparer may not be, and the preparer can be made a witness. An attorney can also retain an accountant under the attorney's privilege to rework the numbers.
Official sources
The rules described on this page come from these primary sources. Check them, or the notice you received, for current figures and dates.
When to call
Get advice before you respond if:
- The audit letter lists more than two or three items, or covers more than one year.
- A revenue agent wants to meet at your business or interview you in person.
- The agent asked for all bank statements, including personal accounts.
- You know income was left off, or expenses cannot be documented.
- You were asked to sign a form extending the statute of limitations.
- You received a 30-day letter or an examination report you disagree with.
Common questions
Direct answers.
How far back can the IRS audit?
Generally three years from the date the return was filed. The period is six years if more than 25 percent of gross income was omitted, and there is no limit if a return was fraudulent or never filed.
Do I have to meet with the IRS auditor myself?
Usually not. You can be represented by an attorney, CPA, or enrolled agent under a power of attorney, and the IRS generally cannot require you to attend without issuing a summons.
What is a 30-day letter?
It is the letter that transmits the examiner's report and gives you 30 days to request a conference with the IRS Independent Office of Appeals. It is different from the 90-day letter, the notice of deficiency, which gives you the right to petition the Tax Court.
Should I sign Form 872 to extend the audit?
It depends. Signing gives the examiner and Appeals more time, which often helps the taxpayer. Refusing typically results in a notice of deficiency based on the current record. You can also negotiate an extension limited to specific issues or a shorter period.
What is audit reconsideration?
It is an IRS procedure for reopening an audit assessment when you did not appear, did not receive the notices, or have new documentation that was not considered. It is discretionary and does not stop collection automatically.
Can an audit lead to criminal charges?
Rarely, but it can. If an examiner finds firm indications of fraud, the civil audit is suspended and the case can be referred to IRS Criminal Investigation. An audit that goes quiet without explanation is a warning sign, and a reason to speak with an attorney.
Related problems
IRS notices rarely arrive alone.
Revenue Officer Representation
A revenue officer is a field collector with a caseload, deadlines, and authority to levy. When one is assigned, the letters are over and a person is now managing your file.
Read more →IRS Appeals & Collection Due Process
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Read more →Federal Tax Lien
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Read more →Payroll Tax & Trust Fund Penalty
Withheld payroll taxes belong to the government from the moment of the paycheck. If the company does not pay them, the IRS assesses the full amount against the people who could have.
Read more →Unfiled Tax Returns
The IRS will not approve a payment plan, an offer, or a hardship status until the missing returns are filed. It may also have filed versions of its own, with no deductions.
Read more →IRS Penalty Abatement
Penalties are often a quarter or more of an old IRS balance, and they are the most negotiable part. A clean three-year history can remove one year's penalties for the asking.
Read more →Next step
Send the audit letter before you send the IRS anything.
The first review covers what was asked, what it could lead to, and what to produce.