An IRS audit begins with a letter, not a phone call. The notice identifies the tax year under review and the items the IRS wants to examine, and it sets a deadline for a response. The tone of that first letter often understates what is at stake, because the outcome of an audit depends heavily on how the taxpayer responds in the first few weeks.

Most audits fall into one of three types. A correspondence audit is handled entirely by mail and usually concerns a limited number of items. An office audit requires the taxpayer or a representative to appear at an IRS office with records. A field audit brings an IRS revenue agent to the taxpayer's home or place of business and is the most thorough of the three.

Below is how representation works, why the choice of representative affects what the IRS can learn, and what happens after the examiner reaches a conclusion.

How representation works

A taxpayer may authorize an attorney, a certified public accountant, or an enrolled agent to deal with the IRS by filing Form 2848, Power of Attorney and Declaration of Representative. Once that form is on file, the IRS must direct its communications to the representative, and the taxpayer is not required to attend meetings or answer questions directly. That separation matters. Taxpayers who speak to an examiner without preparation often volunteer information that expands the audit beyond its original scope. A representative controls what is produced, confirms that each request is within the scope of the notice, and keeps the record organized so the examiner's report is based on complete documentation.

Why privilege matters

Communications between a taxpayer and an attorney for the purpose of obtaining legal advice are protected by the attorney client privilege, which the IRS cannot override. Communications with an accountant have narrower protection. Federal law extends a limited privilege to advice from federally authorized tax practitioners, but that privilege does not apply in criminal matters and does not cover communications about the preparation of the return itself. When an audit raises the possibility of penalties for fraud or a referral for criminal investigation, the difference becomes decisive. An attorney can engage an accountant to work under the attorney's direction so that the accountant's work is covered by the attorney's privilege, an arrangement often called a Kovel engagement. A firm that combines legal and accounting capability can structure the engagement this way from the outset.

What happens after the examination

The examiner closes the audit in one of three ways. A no change letter means the return was accepted as filed. An agreed case means the taxpayer accepts the proposed adjustments and signs a report, after which the additional tax, interest, and any penalties are assessed. If the taxpayer disagrees, the IRS issues a letter, commonly called a 30 day letter, giving the taxpayer the right to protest to the IRS Independent Office of Appeals, which resolves most disputes without litigation. If no agreement is reached, the IRS issues a statutory notice of deficiency, and the taxpayer then has 90 days to petition the United States Tax Court, where the case can be heard without first paying the disputed tax. The IRS generally has three years from the filing date to assess additional tax, extended to six years where a substantial amount of income was omitted, and with no limit where a return was fraudulent or never filed.

Responding to the first notice

The audit notice sets a response date, and the first decision is whether to respond directly or through a representative. Before any records are produced, the taxpayer should read the notice carefully to identify the tax years and the specific items under examination, gather the return as filed and the records that support each questioned item, and note any gaps. A request for a short extension is usually granted if made before the deadline. What the taxpayer should not do is send more than was requested, explain items that were not questioned, or guess at answers. The examiner's job is to test the return, and unprompted information often becomes the basis for additional adjustments.

Organizing the records

Examiners respond well to records that are organized around the items in the notice. For each item, the file should contain the source documents, such as invoices, bank statements, closing statements, and contracts, a schedule that ties those documents to the amount reported on the return, and a short explanation of the position taken. Where records are missing, reconstruction from bank records, third party statements, or sworn affidavits is permitted, and the courts have long allowed reasonable estimates where the taxpayer shows that an expense was incurred even if the exact amount cannot be proved. A representative who prepares the file in this form shortens the examination and reduces the chance that the examiner expands it.

Penalties and how they are contested

Most audit adjustments carry an accuracy related penalty of twenty percent of the underpayment, which applies to negligence and to substantial understatements. The penalty can be avoided by showing reasonable cause and good faith, for example reliance on a competent professional who was given complete information. The fraud penalty is seventy five percent and requires the IRS to prove intent by clear and convincing evidence; an audit that begins to focus on intent, on unreported income, or on the taxpayer's state of mind should be treated as a potential criminal matter and handled by an attorney. Penalties for failure to file and failure to pay accrue separately and are addressed through first time abatement or reasonable cause requests.

Appeals, Tax Court and collection

If the examination ends in disagreement, the taxpayer may file a written protest with the IRS Independent Office of Appeals, which reviews the case with an eye to the hazards of litigation and settles most matters. If no agreement is reached, the IRS issues a notice of deficiency, and the taxpayer has ninety days to petition the United States Tax Court, which allows the dispute to be decided before the tax is paid. Cases involving fifty thousand dollars or less per year may use the Tax Court's simplified small case procedure. Once a liability is final, the collection process begins, and the taxpayer may propose an installment agreement, an offer in compromise, or a currently not collectible status, each of which has its own financial disclosure requirements.

Frequently asked questions

How far back can the IRS audit?
Generally three years from the date the return was filed. The period extends to six years where income was understated by more than twenty five percent, and there is no limit where no return was filed or the return was fraudulent.

Will I have to meet the examiner in person?
Not if a representative is appointed. Once Form 2848 is on file, the IRS communicates with the representative, and the taxpayer's attendance is rarely required.

Does an audit of my business return affect my personal return?
Often. Adjustments to a pass through entity flow to the owners' personal returns, and the examiner may open the personal returns of the owners as part of the same examination.

Can the examiner ask my bank for records directly?
Yes. The IRS can issue a summons to third parties, and the taxpayer is entitled to notice and an opportunity to object. A representative can often narrow a summons by producing the records voluntarily in organized form.

Key Takeaways

• The IRS initiates audits by mail; an unexpected phone call or email demanding payment is not an audit.

• Filing Form 2848 places a representative between the taxpayer and the examiner and keeps the audit within its stated scope.

• Attorney client privilege is broader than the accountant privilege, and the difference matters most when penalties or criminal exposure arise.

• A disagreed audit can be taken to IRS Appeals and then to the Tax Court before any disputed tax is paid.