The (New) IRS Playbook for Tax Audits and Examinations Explored

How the IRS Audit Process Works for Taxpayers

How the IRS Audit Process Works for Taxpayers 

Five Steps on How the IRS Audit Process Works: No US Taxpayer ever looks forward to receiving a notice of IRS audit or examination. And, while the audit is typically nowhere near as bad or nefarious as some fear mongering attorneys would like to make you believe — they are also not enjoyable. An Audit can cost the Taxpayer a significant amount of time, money and resources – in order to effectively fight the audit. The level of complexity (read: headache) of the audit will depend on various factors, such as: the specific IRS agent in charge; if the audit gets expanded into other tax territories — and/or if it leads to an eggshell audit or Special Agent Investigation. For most Taxpayers, the IRS audit process is relatively straightforward. Let’s go through the five basics of how the IRS audit process works.

Notice of Audit Letter Begins the IRS Audit Process

The IRS Audit Process usually begins when the Taxpayer receives a notice of audit in the mail by way of a certified letter direct from the Internal Revenue Service. The audit notice will have a CP or Letter Number — as well as identify that the Taxpayer is currently under audit. The Notice will also identify the year(s) that the Taxpayer is under audit for. Sometimes, the initial audit may only start out for a single year — and other times the Notice of Audit may specify multiple years, although it is usually never more than three (3) years at the outset — and for six years in total. This unless of course the IRS can show civil fraud, which can expand the audit beyond six years. One caveat, is that even if the IRS cannot show facts sufficient to prove fraud, if Taxpayer has not filed tax returns in years past then technically the statute of limitations does not expire (or even begin to run) on those prior tax returns until the tax return is on file with the IRS.

IDR Throughout the IRS Audit Process

Throughout the IRS audit process, there may be several IDRs (Information Document Requests). But, (usually) the initial information document request is the most comprehensive of all the requests. It will require the Taxpayer to provide certain documentation to the IRS in accordance with the purpose of the audit and the information the IRS seeks to discover. Depending on the specific type of audit, the IDR can be relatively short (1-2 pages) or very comprehensive (+20 pages). For example, we have represented taxpayers with complex international compliance issues in which the IDR was more than 30 pages. The Taxpayer should review the IDR with their tax attorney to determine whether or not they have the documents and/or if they want to provide the documents to the IRS. Otherwise, they may submit a response to the IRS identifying why they do not believe they should have to produce the documents.

Preparing an Audit Strategy

While it can be very difficult for Taxpayers to not take the whole IRS Audit process personally — especially when it involves the taxpayer’s business and finances — it is important to try to remove oneself emotionally from the audit — and try to take the audit at face value. At its core, the IRS Agent has a job to do — which is to determine whether or not the Taxpayer’s Tax returns were filed accurately. Some agents may be more pleasant to work with than other agents, but at the end of the day they are just doing a job. And, a very important fact to keep in mind is just because a Taxpayer is audited does not mean they will owe the IRS any money. We have represented taxpayers in several audits which resulted in an NC or “No Change Letter.”

Appear at the Audit (If In-Person Required)

Despite what Taxpayers may have seen the movies, the IRS audit process does not requrie that the audit is handled in person. Many IRS audits are actually handled by correspondence. And, as a result of COVID — and IRS limited resources in general — oftentimes exam appearances can be made by telephone, and even video conference.

At the outset of the audit (assuming it is done in person or via telephone/video), the Agent will go through the basics of the audit; rules of the audit; and obtain some preliminary information. Then, the IRS Agent will ask questions regarding the information sufficient for the Internal Revenue Service to determine whether or not the tax returns were filed properly and accurately. Most of the time, the questions are straightforward and not necessarily designed to trick you — even though it may feel like the agent is prying into personal information.

In fact, most Agents do not have any legal background, and they are just asking questions regarding the issues at hand.

*If you think you are stuck in an eggshell or reverse eggshell audit — which is something a Taxpayer (unfortunately) may not realize until later in the audit — it is important just keep your wits about you and not make any intentional misrepresentations or omissions that can lead to a fraud investigation. This is why it is important to consider retaining experienced Counsel beforehand — at the outset of the IRS audit process.

Audit Complete; Results Pending

Once the audit is complete, it is time to go home — or out for a drink or two. Taxpayers do not receive the results of the examination for weeks or even months later. At that time, the Taxpayer will receive  a 4549 proposed examination changes. If the taxpayer agrees with the changes, they can sign off, make payment (if required) — and the audit comes to an end. If the taxpayer disagrees, they have several opportunities to appeal, seek audit reconsideration of applicable — and/or possibly pursue the matter by way of: Collection Due Process Hearing; Collection Appeal Hearing; Tax Court, or Federal Court — depending on the outcome of the audit and post-audit.

Golding & Golding: About our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure. 

Contact our firm for assistance.