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Understanding your IRS audit, the issues under examination, what the IRS is requesting, and the decisions that may follow requires focus. We are here to help. As you evaluate the information below, you remain in complete control of your timeline and decisions.
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Understanding an IRS Audit and What Happens Next
Receiving notice of an IRS audit can create immediate uncertainty. You may know what the IRS is asking for, but not why your return was selected, how broad the examination may become, what records should be provided, or whether an issue that appears straightforward could lead to additional questions.
An IRS audit is an examination of information reported on one or more tax returns. Depending upon the circumstances, the IRS may focus on a specific item, request substantiation for deductions or income, examine business books and records, or review multiple issues involving one or more tax years. Audits may be conducted through correspondence, at an IRS office, or through a more extensive field examination.
Being selected for an audit does not, by itself, mean the IRS believes you committed fraud, evaded taxes, or intentionally filed an inaccurate return. It does mean the IRS is examining whether particular tax positions and information reported on the return can be supported under applicable tax law.
The important question is not simply what documents the IRS has requested. It is what the IRS is examining, what must be established in response, and how the information you provide may affect the direction and scope of the audit.
Understanding those issues before responding provides an opportunity to organize the relevant records, evaluate the tax positions under examination, identify potential areas of exposure, and approach the audit with a clear strategy rather than reacting to each IRS request as it arrives.
Where Are You in the IRS Audit Process?
An IRS audit can begin in different ways and raise very different concerns. You may have just received a letter, already be exchanging information with an examiner, or be concerned about an issue the IRS has begun to uncover. Start with the situation that most closely resembles what is happening to you.
You Received an IRS Audit Letter and Are Not Sure What It Means
You have received correspondence from the IRS identifying a tax return, tax year, or issue for examination, but you are not yet certain what the IRS is asking you to do.
- The notice identifies a response date or deadline.
- The IRS is asking for information or documentation concerning part of your return.
- You are unsure whether the letter represents an audit or another type of IRS inquiry.
- You do not know why your return was selected.
- You are concerned about responding incorrectly or overlooking something important.
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The IRS Is Asking for Records, Documents, or Financial Information
An IRS examiner has asked you to provide records supporting income, deductions, expenses, transactions, or other information reported on your tax return.
- You have been asked for receipts, statements, accounting records, or supporting documents.
- The IRS is asking questions about specific deductions or transactions.
- You have received a request for bank or financial records.
- Some of the requested information appears broader than the issue you expected the IRS to examine.
- You are uncertain what information is responsive to the request.
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You Do Not Have All of the Records the IRS Is Requesting
Some of the receipts, records, accounting information, or other documentation needed to support your tax return may be missing, incomplete, or difficult to reconstruct.
- Receipts or supporting documents have been lost or are no longer available.
- Your records do not clearly establish a business expense or transaction.
- Accounting records are incomplete or inconsistent with the filed return.
- You need information from a bank, prior accountant, business associate, or another third party.
- You are concerned that you may not be able to substantiate an item the IRS is examining.
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The IRS Is Auditing Your Business or Business Tax Return
The examination involves your company, business activities, books and records, compensation, deductions, employees, or transactions involving the owners of the business.
- The IRS is examining business income or expenses.
- Questions have arisen concerning payments to owners, employees, or independent contractors.
- The examiner is reviewing bank deposits, accounting records, or business transactions.
- The IRS is questioning deductions, losses, compensation, or the business purpose of particular expenses.
- The examination may affect both the business and one or more owners.
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Your IRS Audit Involves Foreign Income, Accounts, Assets, or Business Interests
The IRS is asking questions about income, financial accounts, property, investments, entities, trusts, or other financial interests outside the United States.
- The IRS has asked about foreign bank or financial accounts.
- Foreign income or assets may not have been fully reported.
- Questions involve an FBAR, FATCA reporting, or an international information return.
- You have an ownership interest in a foreign corporation, partnership, trust, or other entity.
- You are concerned the examination may identify additional international reporting issues.
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The Audit Is Expanding or You Are Concerned About More Serious Exposure
What began as an examination of a particular return or issue now appears to involve additional tax years, transactions, questions, or concerns.
- The examiner has begun asking about matters outside the original issue.
- Additional tax years or returns have been requested.
- Questions increasingly concern how or why particular information was reported.
- The IRS appears interested in transactions or records you did not expect to be part of the examination.
- You are concerned that the matter may involve substantial penalties, alleged fraud, or potential criminal tax exposure.
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Understanding and Responding to an IRS Audit Notice
Understanding the Notice • Identifying the Scope of the Audit • Reviewing the Return Before Responding • Managing the IRS Response
Receiving an IRS audit notice establishes something important: the IRS has identified a return, tax year, transaction, or reporting issue it wants to examine. The notice should help establish what is being examined, what information is presently being requested, and when a response is due.
The first step is not simply to gather everything that appears related and send it to the IRS. The notice should be reviewed in the context of the return itself, the underlying transactions and records, and any issues that could become relevant as the examination proceeds.
What This May Mean
An IRS examination may begin narrowly. The IRS may be attempting to substantiate a particular deduction, reconcile reported income with information received from another source, examine a transaction, or review a larger portion of the return.
An audit notice defines where the examination is beginning. It does not necessarily establish where the examination will end.
This is why it is important to identify the tax year and issues involved, understand the stated scope of the examination, review the return before responding, and consider whether other matters on the return could become relevant.
What Matters Now
The response deadline matters. So does the substance of the response.
The return should be reviewed alongside the audit notice and the records supporting the positions under examination. This provides an opportunity to identify missing information, reconcile inconsistencies, understand potential areas of exposure, and determine how the requested information supports the tax position at issue.
If Allen Barron represents you during the audit, your tax attorney can communicate with the IRS on your behalf and help manage the examination as it develops.
The Next Action Step:
Gain insight and guidance through a complimentary and substantive consultation. We invite you to engage the chat module on this page, contact Allen Barron, or call 866-631-3470 to schedule your free consultation and begin the process of understanding your situation, evaluating your options, and determining the most productive steps to address the IRS audit and protect your interests.
You May Also Be Interested In:
→ What to Do If You Receive an IRS Audit Notification Letter
→ 5 Things to Know If You're Facing an IRS Audit
→ Timeframes for an IRS Audit
→ The Statute of Limitations in an IRS Audit
→ U.S. Taxpayers Should Never Communicate Directly With the IRS
Responding to IRS Requests for Records and Information
Understanding What the IRS Is Seeking • Organizing and Reconciling Records • Evaluating What the Documents Establish • Managing the Information Provided
An IRS request for records is not merely an administrative exercise. The documents and information provided become part of the factual record the examiner will use to evaluate the tax positions under examination.
The objective is to respond accurately and appropriately to legitimate IRS requests while understanding what each request concerns and how the information provided relates to the issue being examined.
What This May Mean
The IRS may request receipts, invoices, contracts, bank statements, accounting records, payroll information, transaction documents, correspondence, or other evidence supporting information reported on the return.
Some requests are straightforward. Others may raise questions about the scope of the audit, require substantial accounting work, or reveal inconsistencies that should be understood before the information is provided.
The question is not simply, “Do we have this document?” It is also, “What is the IRS attempting to establish with it?”
That distinction becomes increasingly important as an examination becomes more complex.
What Matters Now
Records should be organized in relation to the tax positions and transactions they are intended to substantiate.
Accounting records may need to be reconciled. Transactions may require explanation. Documents from multiple sources may need to be assembled into a coherent factual record.
There is also an important difference between responding to an IRS request and providing information without first understanding why it has been requested and how it relates to the examination. Experienced representation can help manage that process while maintaining an appropriate and professional relationship with the examiner.
The Next Action Step:
Gain insight and guidance through a complimentary and substantive consultation. We invite you to engage the chat module on this page, contact Allen Barron, or call 866-631-3470 to schedule your free consultation and begin the process of understanding your situation, evaluating your options, and determining the most productive steps to address the IRS audit and protect your interests.
You May Also Be Interested In:
→ Do I Have to Provide Information Requested by an IRS Auditor?
→ Why the IRS Requests Information During an Audit
→ U.S. Taxpayers Should Never Communicate Directly With the IRS
→ What to Expect From an IRS Audit — White Paper
→ Accounting Services
Addressing Missing or Incomplete Records During an IRS Audit
Identifying What Is Missing • Locating and Reconstructing Reliable Records • Establishing the Underlying Facts • Supporting the Tax Position
Discovering that records are missing does not answer the underlying tax question. It identifies a problem that must be evaluated.
The absence of an original receipt or document does not necessarily mean that a transaction never occurred, but the taxpayer still bears important substantiation responsibilities. The issue becomes what evidence exists, what can appropriately be reconstructed, and whether the available evidence supports the tax position being examined.
What This May Mean
Records disappear for many reasons. Documents may have been discarded, accounting systems changed, a former accountant may possess information, electronic records may no longer be readily accessible, or years may have passed since the underlying transaction.
The problem can be particularly significant when the IRS is examining business expenses, basis, deductions, income, real estate transactions, investments, or other matters requiring documentary support.
This is not a reason to create, alter, or guess at evidence. It is a reason to determine what reliable information still exists and whether the relevant facts can be established through appropriate records and other evidence.
What Matters Now
Begin with an inventory of what exists and what is missing.
Bank and credit-card records, invoices, contracts, accounting files, correspondence, third-party records, closing documents, transaction histories, and other contemporaneous information may help establish facts even when the original documentation is incomplete.
The reconstruction should be accurate, supportable, and connected to the particular tax issue under examination. Allen Barron's combination of tax, legal, accounting, and business experience can be particularly valuable when the underlying financial record must first be understood before an effective audit response can be prepared.
The Next Action Step:
Gain insight and guidance through a complimentary and substantive consultation. We invite you to engage the chat module on this page, contact Allen Barron, or call 866-631-3470 to schedule your free consultation and begin the process of understanding your situation, evaluating your options, and determining the most productive steps to address the IRS audit and protect your interests.
You May Also Be Interested In:
→ Why the IRS Requests Information During an Audit
→ Do I Have to Provide Information Requested by an IRS Auditor?
→ Accounting Services
→ What to Expect From an IRS Audit — White Paper
→ 5 Things to Know If You're Facing an IRS Audit
Managing an IRS Audit of a Business or Business Owner
Reviewing Business Books and Records • Examining Income, Expenses and Deductions • Evaluating Transactions and Compensation • Managing Business and Owner Exposure
A business audit can reach well beyond individual entries on a tax return. The examiner may need to understand how money moved through the business, how transactions were recorded, how owners were compensated, how expenses were classified, and whether the books and records support the positions reported on the return.
Closely held businesses can present additional complexity because the financial affairs of the company and its owners may intersect.
What This May Mean
Depending upon the business and the issues under examination, the IRS may review gross receipts, bank deposits, deductible expenses, payroll, compensation, distributions, loans, related-party transactions, worker classification, asset purchases, depreciation, or other items.
An examination may also expose accounting inconsistencies or business practices that require explanation.
For a business owner, the audit should therefore be evaluated as both a tax examination and an examination of the financial facts underlying the return.
What Matters Now
The tax return, financial statements, general ledger, bank accounts, payroll records, ownership records, contracts, and other relevant business information may need to be considered together.
This is where multidisciplinary experience matters.
Allen Barron's tax attorneys and tax professionals approach complex business audits with an understanding of the underlying accounting and business issues as well as applicable tax law. That allows the response to address not merely what appears on the return, but the transactions and financial activity that produced those numbers.
The Next Action Step:
Gain insight and guidance through a complimentary and substantive consultation. We invite you to engage the chat module on this page, contact Allen Barron, or call 866-631-3470 to schedule your free consultation and begin the process of understanding your situation, evaluating your options, and determining the most productive steps to address the IRS audit and protect your interests.
You May Also Be Interested In:
→ Accounting Services
→ California and IRS Tax Attorney in San Diego
→ Do I Have to Provide Information Requested by an IRS Auditor?
→ Why the IRS Requests Information During an Audit
→ What Are the Statute of Limitations on an IRS and California Tax Audit?
Addressing International Tax Issues During an IRS Audit
Identifying International Tax Issues • Reviewing Foreign Income and Assets • Evaluating Reporting and Compliance • Addressing International Exposure During the Audit
International tax issues can materially change the complexity of an IRS examination. Foreign income, accounts, assets, entities, trusts, investments, and cross-border transactions can involve separate reporting obligations in addition to the underlying income tax return.
The first objective is to understand precisely what has been reported, what the IRS is examining, and whether other international reporting issues may exist.
What This May Mean
The examination may involve foreign income, an FBAR, FATCA reporting, Form 8938, interests in foreign corporations or partnerships, foreign trusts or gifts, cross-border transactions, or other international information returns.
In some cases, the taxpayer already knows that a filing or disclosure may have been incomplete. In others, the issue first becomes apparent during review of the audit notice, prior returns, and supporting records.
Once an IRS examination has begun, the availability of procedures that might otherwise have been used to address prior international tax or reporting issues may be affected. That makes it particularly important to evaluate the circumstances before attempting to correct previous filings independently.
What Matters Now
International audit issues require careful coordination between the underlying tax treatment and the associated reporting obligations.
The relevant analysis may include where income arose, ownership and control of foreign assets or entities, account values, filing history, prior professional advice, the taxpayer's knowledge and conduct, and what was disclosed on previous returns.
Allen Barron's international tax attorneys and tax professionals have substantial experience with U.S. taxpayers, businesses, and families whose financial affairs cross national borders. International tax exposure discovered during an audit should be evaluated as part of the examination—not treated as an unrelated filing problem.
The Next Action Step:
Gain insight and guidance through a complimentary and substantive consultation. We invite you to engage the chat module on this page, contact Allen Barron, or call 866-631-3470 to schedule your free consultation and begin the process of understanding your situation, evaluating your options, and determining the most productive steps to address the IRS audit and protect your interests.
You May Also Be Interested In:
→ Coming Into Compliance With FATCA, FBAR and the IRS
→ Offshore and IRS Tax Lawyer to Protect Your Investments and Interests
→ The IRS Knows About Your Offshore Activities
→ IRS Voluntary Disclosure Program (VDP)
→ The Risks of an IRS Quiet Disclosure
Responding When an IRS Audit Expands or Raises More Serious Concerns
Recognizing an Expanding Examination • Evaluating New Issues and Tax Years • Understanding Increased Exposure • Controlling the Response as the Audit Develops
An audit can change as the examiner develops additional information. Questions may move beyond the issue identified at the beginning of the examination, additional years may become relevant, or the IRS may begin focusing more closely on how particular transactions or reporting decisions occurred.
A change in the nature or scope of the IRS's questions is something to understand—not something to speculate about or ignore.
What This May Mean
An expanding audit does not automatically mean that the IRS suspects fraud or that a criminal investigation will follow.
However, the nature of the questions matters. Repeated omissions of income, unexplained transactions, inconsistent records, false or altered documents, concealed assets, or questions concerning the taxpayer's knowledge and intent can raise issues substantially different from an ordinary disagreement over the proper tax treatment of an item.
The distinction between a civil tax dispute, potential civil fraud allegations, and possible criminal tax exposure becomes extremely important when the facts begin moving in that direction.
What Matters Now
Pay attention to what has changed.
Has the examiner requested additional years? Are questions moving beyond substantiation and toward your knowledge or intent? Have new transactions, accounts, entities, or sources of income become part of the examination? Is the IRS questioning the accuracy or authenticity of records?
These circumstances warrant careful legal evaluation.
They also highlight an important distinction between accounting assistance and legal representation. When an examination presents potential fraud, privilege, substantial penalty, or criminal tax concerns, decisions about communications, records, representation, and strategy should be made with those risks clearly understood.
Allen Barron's multidisciplinary structure allows legal, tax, accounting, business, and international issues to be evaluated together when the examination becomes more complex.
The Next Action Step:
Gain insight and guidance through a complimentary and substantive consultation. We invite you to engage the chat module on this page, contact Allen Barron, or call 866-631-3470 to schedule your free consultation and begin the process of understanding your situation, evaluating your options, and determining the most productive steps to address the IRS audit and protect your interests.
You May Also Be Interested In:
→ Should You Amend an Error in a Previous IRS Tax Filing or Hope They Didn't Notice?
→ Appealing an IRS Audit Notice of Determination
→ The Statute of Limitations in an IRS Audit
→ U.S. Taxpayers Should Never Communicate Directly With the IRS
→ IRS Audits Are Fewer in Number but Increasingly Aggressive
THE MOST IMPORTANT THING YOU NEED TO KNOW RIGHT NOW
The greatest risk you face, and the greatest opportunity to achieve the best outcome in your IRS audit, isn't down the road, during the audit, or in tax court. It is right now.
There are actions you should take, and those that might unnecessarily harm your interests. There are records and information you may need to locate, preserve, organize, and understand before they are provided to the IRS. There are communications you should make, and others that may be better handled by an experienced tax attorney on your behalf.
How will you know the difference?
An IRS audit develops through information. The return that was filed, the records supporting it, the documents provided during the examination, answers to an examiner's questions, accounting information, and explanations of particular transactions can all affect what the IRS understands about the return and what questions may follow.
You do not need to predict the outcome of the audit today. You do need to understand what the IRS is examining and make deliberate decisions about what happens next.
This Is Why You Need to Speak With an Experienced San Diego IRS Audit and Tax Attorney
An experienced tax attorney can help you understand the notice you received, identify the issues the IRS appears to be examining, review the underlying return and available records, and determine what additional information may be needed before a substantive response is made.
Counsel can also help you understand which communications should come directly from you and which may be better handled through your representative. If appropriate, your attorney can communicate directly with the IRS, respond to the examiner, coordinate accounting and tax analysis, and help manage the examination as it develops.
The objective is not to make the audit unnecessarily adversarial. It is to approach the IRS from an informed position, with the facts, records, tax issues, and potential areas of exposure understood as clearly as possible.
Understand the Return Before You Explain It
The tax return under examination is the starting point.
Before records are produced or substantive explanations are given, it may be important to review the return alongside the underlying accounting information and supporting documentation. What income was reported? What deductions, credits, losses, transactions, or tax positions are being questioned? What evidence supports them? Are there discrepancies that should be understood before the IRS asks about them?
This is particularly important when the return involves a closely held business, complex transactions, investments, real estate, foreign income or assets, or information prepared from records maintained by several different people or professionals.
You should understand your own return and the facts behind it before attempting to explain either to the IRS.
Preserve and Organize the Information That May Matter
Preserve the audit notice, the filed return, workpapers, accounting records, bank and financial statements, receipts, invoices, contracts, correspondence, electronic records, and other information that may relate to the issues under examination.
Do not alter records, create documents that did not previously exist, or attempt to make incomplete records appear complete. If documentation is missing, that issue can be identified and evaluated. There may be legitimate sources of additional evidence or appropriate methods of reconstructing relevant financial information.
The objective is to establish an accurate and supportable factual record—not simply to accumulate documents for delivery to the examiner.
Understand What the IRS Is Asking Before You Respond
An IRS request for information should be taken seriously, but the existence of a request does not eliminate the need to understand it.
What tax issue does the request concern? What period does it cover? What information is responsive? Does the requested material require explanation or reconciliation? Has the examiner begun asking about matters beyond the issue that originally appeared to be under examination?
The same principle applies to conversations with an examiner. A question that sounds simple may concern a transaction, accounting treatment, business purpose, source of income, reporting decision, or other issue whose significance is not immediately apparent.
Respond accurately. Respond appropriately. But understand the question and its significance before providing an answer you may later need to explain.
Pay Attention if the Audit Begins to Change
Many IRS audits remain focused on the issues identified during the examination. Others develop.
The examiner may request additional records, ask about another transaction, examine another tax year, identify inconsistencies, or begin asking questions that reach beyond simple substantiation.
A change in scope does not automatically mean something more serious is occurring. It does mean you should understand why the examination is changing and whether the new questions create additional tax, penalty, international reporting, civil fraud, or other legal concerns.
This is especially important when the audit involves a business, substantial unreported income, foreign accounts or assets, incomplete records, related entities, or questions concerning how and why information was reported.
We Invite You to a Complimentary and Substantive Conversation
We invite you to a complimentary and substantive conversation regarding your IRS audit, objectives, and concerns. You can reach out through the chat module on this page, our contact form, or by calling 866-631-3470.