IRS Audit Representation

With audit cases the focus is not on your ability to pay but rather on supporting documents that will enable us to prove any deductions that the IRS or state is challenging you on. The critical part of audit cases is to show the auditor in a clear and concise manner, how you came up with your expenses and to present them in a way that follows basic accounting principles. Many of our clients are audited and do not have back up documentation for expenses they claimed on the return in question. Part of audit representation involves reconstructing your reasonable expenses to help minimize the assessment of additional tax. Our representation during the auditing process involves not only proving your income or expenses, but a big part of it also involves persuading the auditing officer to adopt a more reliable audit methodology that is more conducive to the taxpayers industry and business practices.


There are several types of audits that are conducted by the IRS. These may be in the form of mail correspondence sent to you or they can include a face-to-face meeting. If you receive a letter from the IRS informing you that you have been selected for an audit, the worst thing you can do is IGNORE it. We have worked with clients that were so afraid to attend the audit they do not reply, and thereby end up owing an exorbitant amount in additional taxes. The additional tax assessment is inflated since the auditor’s request for information was not honored, they cannot simply dismiss the audit due to a taxpayer’s failure to respond. Even if you never got the letter from the IRS because you moved, or it never came in the mail, there is no excuse for missing the audit. The auditor will disallow a whole series of tax deductions you claimed because no proof was given on them when requested. A taxpayer that has not filed tax returns for a couple of years may not have their current address information on file with the IRS, so an audit could be conducted without the taxpayer’s knowledge since the Service only has their last known address on record from years ago. You may think that being audited under these circumstances should not be your fault since you never received notice of an audi, but the IRS’ position is that you should be current with your tax filings and have a duty to keep the IRS up to date with your current mailing address.

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IRS Correspondence Indicating an Audit May be Imminent:

Tax Return Compliance Letters (Error in calculations or improper credit/deduction calculated) The IRS may send you a computer generated letter stating that a certain item on your tax return has a possible error and that they have automatically adjusted these errors and are sending you a bill. It is very possible that these automated letters can be challenged if you know the tax regulation that privileges you to claim that deduction, credit, etc. We have encountered cases where the IRS’s automated system sent letters to the client, and their tax preparer was unable to defend the claim they made on the return. There are some tax preparers that may rely heavily on the tax preparation software to complete preparation of a return without knowing exactly how the tax is being calculated. Many tax preparers just input information and send you on your way. This actually happens A LOT. After tax season is over, you may get a letter from the IRS stating you made an error on your return and they are billing you. You then try to contact your preparer and they are not available for the rest of the year. Has that ever happened to you? You need a representative that understands these letters and can help you in defending a claim you made if such a defense is warranted. Usually, these defenses are written letters explaining the claim and justifying it by citing tax code regulations or tax publications explaining how the rules were applied to your particular situation in preparing your tax return.

Underreported Income
Another type of correspondence sent by the IRS is called a CP2000 letter (this is the notice identification number on the form letter issued by the IRS). The CP2000 is usually sent through the IRS’ automated system. It notifies the taxpayer that income reported on the taxpayer’s return was less than the total amount of income reported to the IRS. Some taxpayers may not bring all of their tax documents to their tax preparer at tax time, which can result in a return being prepared missing critical income information. The IRS will catch that a discrepancy exists based on the information they have received from 3rd-parties and what you have reported on your tax return, and they will send you a CP2000 notice explaining there was a discrepancy that required a revision of your return accordingly. However, it may take a year or two for you to receive this notice. By the time a notice of additional tax assessed is received, you will also owe an “accuracy-related penalty” and interest on the tax amount assessed. If you receive these types of letters, we can review them to claim any additional credits or deductions that would offset part of the underreported income. CP2000 replies are written responses that are mailed or faxed into the IRS “Underreporting Unit” also known as the AUR (Automated UnderReporter) unit.

Jim received a CP2000 letter from the IRS claiming he failed to report gambling income of $25,000. The CP2000 form states that due to the underreporting of this income, he has an additional tax assessment. Jim had gambling losses that exceeded the gambling winnings of $25,000 so he replies to the CP2000 letter and informs them of this. The IRS accepts and allows Jim’s gambling losses and closes the CP2000 with a lesser tax liability.

Face-to-Face Audits
A face-to-face audit is also known as a field audit. A local IRS representative, known as a Tax Examiner or a Revenue Agent (RA), will call you to schedule a time and place to meet to conduct the audit. The RA gives you a choice to conduct the audit at your place of work, your home, or the local IRS office. It is also possible that a meeting can be conducted via telephone if all proof elements can be mailed to the auditor in a clear and concise manner and explained to them through a telephonic conference. Some taxpayers choose to take on the audit themselves, only to find out that they may have opened themselves up to further probing from IRS personnel. It is best to know how to respond the first time during an audit in order to reduce the chances of extending the audit to other years.

Common Questions about IRS Audits

How long does the IRS have to Audit my tax Return?
The IRS has three years from the date a return was filed to assess you any additional tax through an audit examination. This means they have to reach their conclusions for a proposed assessment by the end of the statute period. If time is running out for the IRS and they are in the middle of an audit, they often ask the taxpayer to sign a “Waiver to Extend the Collection Statute Period.” They want you to sign this form so that they can take the time to further probe a tax year in question! If you don’t sign the form, what they would do is expedite their conclusions and give you very short deadlines to prove them otherwise. You need to consider signing an extension form very carefully as their impact on your particular case can determine how much you will end up owing.

What if I never attended the Audit because I didn’t know about it (or I was too scared to respond)?
This does happen to many taxpayers, whether they find out about the additional assessment through a collection letter or a surprise levy on their bank account or wages. The issue with missing your audit is that you may no longer have appeal rights if you missed deadlines given to you through several correspondences sent by the IRS. The IRS sends you a series of letters and may even try to contact you via telephone to try to get a hold of you. If you do not have current contact information on file, you may miss their attempts to reach you before collection activity ensues. The IRS sends a NOTICE OF DEFICIENCY after several reports and analysis have been conducted during the audit process. The Statutory Notice of Deficiency does not require you to make an immediate payment nor is it a tax assessment. The notice is simply a proposed deficiency, which usually gives you 90 days (or 150 days if the notice was addressed to a person outside the United States) to file a petition to the Tax Court if you disagree with the changes made by the IRS. The Notice of Deficiency package should contain a report of all the changes that the IRS has made. The report showing all changes is called a Form 4549 (or 4549-A). For the untrained eye, the report can be very intimidating.

If you missed this letter and do not know how an assessment was calculated against you, you will need the help of a tax resolution professional to order the audit report from the IRS for professional review and action. Fortunately, there IS an opportunity to fight these types of assessments through what is known as an Audit Reconsideration. This is explained on the Audit Reconsideration page.


Income Tax Audits
Most often, a state will receive information from the IRS upon the conclusion of an IRS audit resulting in an increase of income tax assessed. The states normally take the changes from the IRS and recalculate your state taxes. This can take several months, but the state will eventually get that information and they will make changes to your state taxes to conform to the changes made by the IRS. You may also contact the state and present them with the IRS audit changes so that they can make the tax calculations earlier and not later. Why would this be better for you? Because if the state is uninformed of the IRS audit changes for several months, that means that there will be interest accruing for those months until they get the proper information and send you an accurate bill. Rather than wait for this to happen, you are better off knowing what the bill is and how soon you can start paying it in order to reduce or lessen the burden of penalty and interest accruals.

Part of the strategy to help with state audits is to first handle the IRS audit and confirm positive results from taking action for reconsideration before pursuing a state audit reconsideration using the same consideration elements. It is also important to know the statutes and appeal deadlines in order to present disputed audit items for consideration. The IRS and the states have their own statutes governing their audit procedures. Some states do not have regulations that allow a closed audit case to be reopened.

Sales Tax (Privilege Tax) Audits and Withholding Tax (Payroll) Audits
States have their own set of rules when it comes to sales audits and payroll audits. Small business owners should maintain proper bookkeeping in order to report correct sales tax to their states. When the books and records of a business are inadequate based upon an auditor’s set of audit guidelines (different for each state), then these auditors can rely on an alternative auditing method to produce an estimated sales volume and tax the business accordingly. If this occurs, the estimated sales volume and its related sales tax could be astronomical. Some auditing methods used by some states consist of a day’s observation of sales which is then multiplied for the number of operating days that are within the auditing period. Other methods used are based on general mark-up percentages that may not properly account for inventories of a taxpayer’s unique business practices. These indirect audit methods can have a huge impact on your bottom line.

We work with small-businesses and individuals to help them in any stage of their audit with the IRS or state entities. We will review your records, review the state’s analysis of audit, and from that we will work to find the best possible resolution for your case.