IRS audit defense

What types of IRS audits exist?

The IRS conducts four principal audit types. Correspondence audit (mail audit) — the most common, typically targeting specific schedule items (Schedule A itemised deductions, Schedule C business expenses, Schedule D capital gains, EITC eligibility) — handled entirely by mail with documentation requested in IRS Notice CP2000 or similar; resolution often within 90 days. Office audit — conducted at an IRS Taxpayer Assistance Center; targets more complex returns or specific issue clusters; typically resolves within 6 months. Field audit — conducted at the taxpayer's home or place of business; reserved for high-income individuals, businesses, and complex multi-issue returns; typically takes 12-24 months. Taxpayer Compliance Measurement Program (TCMP) audit — random-sample audits to inform IRS audit-selection algorithms; line-by-line review at the deepest level. The selection criteria for non-TCMP audits include the Discriminant Inventory Function (DIF) score (a statistical model that flags returns deviating from norms), document-matching mismatches (W-2/1099 reported by payer doesn't match return), specific-project flags (high-income non-filers, micro-captive insurance, syndicated conservation easements, crypto disclosure), and information from third parties (SARs from FinCEN, John Doe summonses, whistleblower claims).

What is the response strategy?

The immediate response priorities: (i) respond within the stated deadline — IRS notices typically allow 30 days for response; missing the deadline can convert a routine inquiry into a default assessment with full burden-of-proof shift to the taxpayer to undo; (ii) retain Circular 230-credentialed representation — only Certified Public Accountants, Enrolled Agents, and attorneys can represent taxpayers in IRS proceedings; Annual Filing Season Program participants can represent only on returns they prepared; unenrolled preparers cannot represent at all; (iii) provide only requested documentation — over-disclosure expands audit scope; under-disclosure invites adverse adjustment; (iv) prepare a Form 2848 Power of Attorney — formally authorises the representative to communicate with IRS on the taxpayer's behalf; (v) maintain contemporaneous documentation — receipts, bank statements, invoices, mileage logs supporting the positions claimed; the Cohan rule allows reasonable estimation in some categories where exact records are unavailable but contemporaneous evidence exists. Tax practitioners typically open a separate audit-defense engagement with a defined scope statement and fee structure; the engagement letter establishes the boundaries between original-return-preparation engagement and audit-representation engagement.

What appeal rights exist after an adverse determination?

After an examination ends with a proposed adjustment, taxpayers have several layers of appeal. The IRS Independent Office of Appeals provides administrative review separate from the examining officer; the goal is settlement without litigation. Statistical outcomes: approximately 60-70 percent of cases reaching Appeals settle short of full IRS adjustment; 20-25 percent fully concede; 5-15 percent proceed to litigation. The 30-Day Letter (formal proposed adjustment) opens the Appeals window. If the taxpayer does not respond or settlement fails, the 90-Day Letter (Statutory Notice of Deficiency) opens the path to US Tax Court — the only forum permitting suit before paying the disputed tax. Alternative forums: US District Court and US Court of Federal Claims require pre-payment of the disputed tax (refund-claim suits). Each forum has different procedural advantages — Tax Court has tax-specialist judges and small-tax-case procedures for amounts under USD 50,000; District Court permits jury trial; Court of Federal Claims hears non-tax claims as well. Practitioners typically run a forum-shopping analysis comparing the strength of the case under each forum's precedent.

What audit triggers should filers be aware of?

Common audit-trigger profiles practitioners catch on review: (i) high Schedule A itemised deductions relative to income — particularly charitable contributions, casualty losses, and home-mortgage-interest claims that exceed peer-group norms; (ii) Schedule C self-employment losses for multiple consecutive years — IRS hobby-loss rules under IRC §183 catch activities not engaged in for profit; (iii) cash-intensive businesses with low reported income (restaurants, bars, taxi/Uber drivers, certain retail); (iv) inconsistencies between bank deposits and reported income — IRS bank-deposit analysis is a standard audit technique; (v) foreign-asset reporting failures — FBAR (FinCEN Form 114), Form 8938, Form 5471 are heavily scrutinised; (vi) cryptocurrency disclosure mismatch — the digital-asset question on Form 1040 plus Form 1099-DA broker reporting from 2025 onwards creates substantial mismatch potential; (vii) micro-captive insurance and syndicated conservation easements — both flagged as 'listed transactions' under Notice 2016-66 / Notice 2017-10 with mandatory disclosure under §6011; (viii) unreported partnership or S-corp income — Schedule K-1 mismatches with partner-level returns. The post-2022 Inflation Reduction Act funding for IRS enforcement materially expanded examination capacity for high-income individuals and large pass-through entities.

How do other major jurisdictions structure tax audits?

Most major economies operate analogous audit frameworks with jurisdiction-specific procedural rules. UK: HMRC opens an enquiry under sections 9A or 12AC TMA 1970; the enquiry window is 12 months from the filing deadline (or filing date if late) for individual returns. Discovery assessments under section 29 TMA 1970 reach back further with stricter conditions. Statutory Review and First-tier Tax Tribunal appeal paths. Canada: CRA reassessment within the standard 3-year window (4 years for non-CCPCs, 6 years for transfer-pricing). Notice of Objection within 90 days, Tax Court of Canada appeal. Australia: ATO amendment within 2 years (4 years for some) of the original assessment; Reportable Tax Position schedule for high-tax-risk transactions; Administrative Appeals Tribunal then Federal Court. Germany: Außenprüfung (field audit) framework under §193 AO with 3-month notice + Schlussbesprechung (closing meeting). France: contrôle fiscal (general audit) + vérification de comptabilité (corporate audit) framework with 3-month notice + débat oral et contradictoire. India: Faceless Assessment + Faceless Appeal post-2020 reform with mandatory video-conferencing rather than in-person — among most digital audit frameworks globally. The cross-jurisdictional pattern: most major economies have moved to risk-based audit selection plus increased data-matching plus electronic-portal communication post-2018.