I Received an IRS Audit Notice. What Should I Do?
A first 48-hour decision guide for identifying the examination, reading the notice correctly, preserving the record, and deciding on representation before responding.
Do three things before you respond to anything.
First, identify what you actually received. A CP2000 is not an audit. A Letter 566 correspondence examination, an office examination conducted by a tax compliance officer, and a Letter 2205 or 2205-A field examination conducted by a revenue agent are three different proceedings with different scope, different personnel, and different escalation risk.
Second, extract five facts from the notice: the tax years, the specific line items or issues identified, the response deadline, the IRS operating division and employee assigned, and whether the letter requests documents or schedules an interview.
Third, preserve records and stop generating new ones about the transactions under review.
Most of the damage in an examination occurs in the first two weeks, before the taxpayer understands the scope of the inquiry. The two most common errors are answering questions that were never asked and producing records for years and issues the IRS has not opened. Neither is required. Both enlarge the examination.
Step One: Determine What Kind of Proceeding Has Begun
For most individual and business examinations, initial contact is made by mail. The IRS does not initiate an examination by email or text. IRS employees may telephone taxpayers after written contact has been made. A caller who claims to be opening an audit without prior written contact should be treated cautiously and independently verified.
Not every letter proposing additional tax is an examination. The Automated Underreporter program generates a CP2000 when third-party information returns, such as a Form 1099 or Form W-2, do not match the return. That is a computer matching notice, not an examination conducted under I.R.C. section 7602. It is often resolved by showing where the item was reported or that the information return is wrong. It matters that you identify it correctly, because responding to a CP2000 as though it were a field audit invites disclosure the matching program never requested. It also matters that you not ignore it: an unresolved CP2000 proceeds to a statutory notice of deficiency in the same way an examination does.
A correspondence examination is conducted entirely by mail from a campus. It is typically confined to one or two identified items, such as charitable contributions, unreimbursed employee expenses, dependency exemptions, or an earned income credit. No revenue agent is assigned to visit.
An office examination is conducted at an IRS office by a tax compliance officer. It usually involves a return with several issues that require documents and explanation but not a walk through a business.
A field examination is conducted by a revenue agent at the taxpayer's place of business or the representative's office. Field examinations are assigned to returns with business activity, entity structures, related parties, or issues that cannot be resolved from documents alone. A field examination signals that the IRS has committed a graded employee to the return.
The distinction is not cosmetic. It predicts the depth of the inquiry, the likelihood that additional years and related entities will be added, and whether the examiner has authority to expand the scope on his own initiative.
Step Two: Read the Notice for the Facts That Control the Case
Before anything is produced, extract and calendar the following.
The tax periods. If the notice lists one year, that is the open examination. It does not prevent the IRS from adding years, but it defines what has been opened.
The identified issues. A correspondence letter usually itemizes them. A field examination often arrives with a Form 4564 Information Document Request that reveals the examiner's theory more precisely than the opening letter does.
The response date. Correspondence examination letters commonly allow 30 days. That date is administrative, not jurisdictional, but a missed date can produce a default assessment posture that is harder to unwind than a timely response.
The assessment statute. Under I.R.C. section 6501(a) the IRS generally has three years from filing to assess. That period extends to six years where the return omits more than 25 percent of gross income, section 6501(e)(1)(A), and is unlimited for a false or fraudulent return or for an unfiled return, section 6501(c)(1) and (c)(3). Knowing how much time remains tells you a great deal about the examiner's leverage and about whether a consent to extend will be requested.
The employee and division. An SB/SE revenue agent, an LB&I team, a TE/GE specialist, and a campus tax examiner do not have the same authority or the same inventory pressure.
An audit notice often defines the response deadline, issues under examination, and records being requested. Before responding, those elements should be identified and the scope of the examination should be understood.
Step Three: Preserve the Record Before You Produce Anything
Section 6001 requires taxpayers to keep records sufficient to establish the items on the return. In an examination, the practical rule is narrower and more urgent: preserve everything relating to the years and issues identified, and do not create new documents that purport to reconstruct events.
Two specific cautions.
Reconstructed records are not inherently improper, and in some contexts they are all that exists. But a summary prepared after the notice arrives should be identified as what it is. A schedule presented as contemporaneous when it was prepared last week is the kind of fact that converts a substantiation dispute into a credibility dispute, and credibility disputes are where penalties are decided.
Electronic records deserve deliberate handling. Automatic deletion policies, mailbox retention settings, and accounting system purges continue running while the examination proceeds. Suspend them for the relevant custodians and periods.
The Distinction That Matters Most: Substantiation Versus Admission
An examination asks whether items on the return are supported. It does not obligate the taxpayer to narrate the transactions, explain intent, or characterize conduct.
Providing substantiation means producing the invoice, the bank record, the contract, the mileage log, the closing statement, the board minutes. Making an admission means supplying the examiner with a factual statement that establishes an element the government would otherwise have to prove.
Consider a deduction for consulting fees paid to an entity owned by the taxpayer's brother. Substantiation is the engagement letter, the invoices, the wire confirmations, and evidence of the services performed. An unnecessary admission is the taxpayer volunteering that the amount was set to move income to a lower-bracket relative. The first supports the deduction. The second supplies the theory for disallowance, and possibly for a penalty.
The same principle governs interviews. Section 7521(b)(2) provides that if a taxpayer clearly states during an interview that he wishes to consult a representative, the officer must suspend the interview. Section 7521(c) generally prevents the IRS from requiring the taxpayer to accompany the representative absent an administrative summons. Those provisions exist because unrepresented interviews produce statements that cannot be retracted.
Representation: Form 2848 and When It Should Be a Lawyer
Form 2848, Power of Attorney and Declaration of Representative, authorizes an attorney, CPA, or enrolled agent to receive notices, obtain the administrative file, communicate with the examiner, and appear on the taxpayer's behalf. Complete it for each tax period and each type of tax at issue, and confirm it covers the years the examiner may add.
For a comprehensive analysis of when counsel is warranted and how to evaluate the decision to hire a tax attorney, see When Should You Hire a Tax Attorney for an IRS Audit?
Once a representative is engaged, the examination is conducted through that person. Correspondence and interview requests route to the representative, and the examiner ordinarily does not contact the taxpayer directly on substantive matters. The protection is not absolute. Section 7521(c) permits an IRS employee, with the immediate supervisor's consent, to notify the taxpayer directly that the representative is causing unreasonable delay or hindrance, Treas. Reg. section 601.506(b) provides a bypass procedure, and a summons may be issued to the taxpayer.
A CPA is often sufficient where the dispute is documentary. A missing acknowledgment letter for a charitable gift, a depreciation schedule, a basis computation supported by closing statements, a mileage log that exists but was not attached: these are accounting problems, and the practitioner who prepared the records is usually the right person to present them.
The calculus changes when the dispute is legal rather than documentary, or when the answer to a factual question could support a penalty or a referral. The most consequential difference is privilege. The attorney-client privilege protects communications made to obtain legal advice. Section 7525 extends a limited privilege to federally authorized tax practitioners, but it is narrower: it does not apply in criminal matters and does not apply to written communications in connection with promoting a tax shelter. No privilege attaches to return preparation work, and an accountant's workpapers are generally obtainable. Where the facts are sensitive, communications should be structured through counsel from the outset, including any accountant engaged to assist counsel under the Kovel arrangement described in United States v. Kovel, 296 F.2d 918 (2d Cir. 1961). Kovel is not a general accountant privilege and its application is fact dependent.
Representation can change how an examination proceeds, particularly where the issues are legally significant, the requested records are extensive, penalties are implicated, or the matter may move to Appeals or litigation.
Request an Initial Case ScreeningRed Flags That Change the Analysis
Certain features convert an ordinary examination into a matter that should be evaluated by counsel before the next response.
Indicators of fraud. The IRS trains examiners to identify affirmative acts suggesting an intent to evade, including omitted income, false documents, concealed accounts, and inconsistent statements. See IRM 25.1. A referral to Criminal Investigation is not announced. It is often preceded by the examiner becoming less communicative and more interested in intent than in documents.
Unreported foreign accounts or unfiled international information returns. Form 5471 under I.R.C. section 6038, Form 8938 under section 6038D, Form 3520 under section 6048, and the FBAR under 31 U.S.C. section 5314 each carry penalty regimes that are separate from income tax and, in the case of the FBAR, willfulness penalties that can dwarf the account balance's tax cost.
Employment tax issues. Unpaid withheld taxes expose responsible persons to the trust fund recovery penalty under I.R.C. section 6672, which is asserted against individuals personally and is generally not dischargeable in bankruptcy. A request to complete Form 4180 is an interview to determine responsibility and willfulness, not a routine information request.
Large or structural unreported income. Bank deposits analysis, a net worth method, or a source-and-application-of-funds analysis indicates the examiner is building an indirect proof case.
Multiple years or related entities. Adding years, or opening the returns of a controlled entity or a related individual, signals a scope decision has been made.
A summons. An administrative summons under I.R.C. section 7602 means the informal phase has ended. Third-party summonses carry notice requirements under section 7609 and a limited right to move to quash.
Proposed penalties. Accuracy-related penalties under section 6662, and particularly the civil fraud penalty under section 6663, require separate analysis and a separate factual record from the underlying adjustment.
What the First 48 Hours Should Produce
At the end of two days you should have: a correct identification of the proceeding; a calendar containing the response date and the assessment statute expiration for each year; a preservation instruction issued to everyone who holds relevant records; a copy of the return, the workpapers, and the preparer's file for each year at issue; a preliminary assessment of whether any red flag above is present; and a decision on representation.
What you should not have is a submission already mailed.
If you have received an examination notice, the response window and the assessment statute should be reviewed before any documents are produced. Chase Counsel handles selected federal tax controversy matters and can review the notice, the scope of the examination, and the representation question at the outset. Learn more at www.ChaseCounsel.Com/federal-tax-controversy.
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This article discusses federal tax procedure generally and is not legal advice for any particular taxpayer. Examination procedures, deadlines, and available remedies depend on the notice received and the posture of the case.