The IRS uses several methods for choosing tax returns for examination. Just because your tax return was selected does not mean that the IRS believes you lied or cheated on it. The IRS examination is a review of your return to ensure that information is reported correctly according to tax laws and to verify that the reported amount of tax is correct.
Notice of IRS Examination & Types of IRS Examinations
The IRS notifies the taxpayer via regular mail that the taxpayer’s return has been selected for examination. The IRS does not initiate an examination by telephone. There are several types of “examinations,” each implicating a different set of procedures that are utilized to “conduct” the examination.
Correspondence Examination:
According to IRS statistics for returns examined in Fiscal Year 2023, less than 1% of all returns filed (212 million) were examined. Of all examinations closed in 2023, roughly 77% were conducted via correspondence (approximately 450 thousand). A correspondence examination typically begins with an IRS computer-generated letter to the taxpayer that sets forth the examination process, identifies one or more items on the tax return that are being questioned, and requests information to explain the items being questioned. An IRS examiner will then review the taxpayer’s response and determine whether to close the case, request additional information, or recommend a tax change.
Office Examination:
An office exam is generally conducted by tax compliance officer (“TCO”). As with all IRS exams, the taxpayer is notified via regular mail that the taxpayer’s return is under exam. Generally office examinations are more fact intensive and are therefore more efficiently conducted by an in person meeting with the taxpayer or the taxpayer’s representative. TCOs generally try to reach a decision by the end of the first meeting so being well prepared for the first meeting is very important.
Field Examination:
For Fiscal Year 2023, the IRS closed approximately 132 thousand field examinations. Field examinations are conducted by revenue agents. Revenue Agents are generally better trained and are more skilled than other types of examiners. Most field examinations involve a business (i.e., Schedule C, corporation, S corporation, or partnership). Since a business is usually involved, field examinations are typically more complicated and more wide ranging than correspondence or office examinations. As a result, field examinations can take months to complete, usually require multiple information document requests (“IDRs”), and usually more than one meeting with the taxpayer or the taxpayer’s representative.
For more on what to expect in an IRS field examination, see: What to Expect in an IRS Examination: Key Concepts & Stages in a IRS Field Examination
The IRS statistics come from the IRS’s 2023 Data Book, Pub 55-B (Rev. 4-2024).
Goal Of Representation
Our goal is to zealously advocate for our clients to minimize adjustments resulting from the examination. We work with clients to efficiently review the data necessary to represent the client. We interface with the IRS examiner so that the client can avoid the discomfort of having to speak with the IRS. However, we stay in contact with the client throughout the process to ensure they understand where we are in the examination process and the issues being raised. We facilitate the round-up of any follow-up documentation that is needed to support positions on the tax return. If necessary we provide research on specific issues that are raised during the exam. We always advocate for our clients and attempt to reach a reasonable settlement if a taxpayer cannot fully substantiate a deduction or if the IRS disagrees with a position. And, if the initial IRS examination does not lead to the right result, we help the client appeal any erroneous results through IRS appeals or Tax Court.
Summary of Engagement
If you received an IRS notice we can meet with you to review your case and provide some preliminary advice on steps to take. And after an initial free consultation, you can decide if you want to retain us to represent you in your IRS examination. Below is a brief summary of the steps in a typical IRS Audit engagement.
Initial Free Consultation
- During our first meeting, we will review any documents that you receive from the IRS (e.g., notices/letters re: audit to determine what type of audit you face and which tax returns are subject to the audit.
- Next we will review copies of your returns, if you have them available, and we can discuss your tax history (i.e., filed returns, significant positions, who helped prepare the returns, concerns you may have).
- In addition, if you have already had any contact with the IRS agent–either directly or through another representative (e.g., tax attorney, CPA), we will discuss those communications.
- After reviewing the notices and returns with you, we can come up with a preliminary view regarding the estimated scope and cost to represent you.
Engagement
- After meeting, if you want to utilize our services, we can discuss the engagement letter and fee structure.
- Fill our Power of Attorney Forms (see Form 2848)
- Preliminary Document Request
- IRS Examination
- Contact the Examiner to alert them that we will be representing you in the examination. During this initial contact, we will set up the next meeting with the agent and discuss any document requests (see Information Document Request “IDR”s)
- Review Transcripts
- Review your returns in greater detail along with any information provided during the preliminary
- Work with the Revenue Agent to provide necessary documentation to minimize tax adjustments.
- Review and Respond to Proposed Adjustments
- Post-Exam:
- Determine if IRS Appeal or appeal to Tax Court is necessary.
- If needed, assist the client with payment arrangements with the IRS.
Our Comprehensive Approach to IRS Examinations
Our focus is on examinations of small businesses and their owners. We have experience representing a number of small businesses and small business owners in IRS examinations. In addition to understanding IRS examination procedures, we have years of experience working as a CPA, so we know our way around a company’s financial statements, books, records, and tax returns. We leverage my years of experience with financial statement audits and tax return preparation to navigate a client’s books, records, and tax returns to assess the client’s positions and advocate for our client’s positions.