IRS Audit Representation

An IRS examination is a process with fixed decision points, and the outcome usually turns on how the first two are handled: what you produce in response to the initial information request, and what you say about it. Most of the damage we are asked to repair was done before anyone called a lawyer.

This page covers examinations generally, with emphasis on individual and pass-through returns. Entity-level examinations — payroll tax, employment classification, and corporate issues — are addressed on our business tax audits page. We represent taxpayers throughout Temecula, Murrieta, San Diego, Riverside, and San Bernardino, and nationally for clients with California connections.

Three Kinds of Examination

Correspondence audits arrive by mail and address one or two items — a mismatched information return, a disallowed credit, unreported income the IRS already has data on. They are handled entirely on paper and are the most common by a wide margin. They are also routinely mishandled, because taxpayers send a partial response or none at all and the adjustment becomes final by default.

Office audits require an appearance at an IRS office with specified records. The scope is defined but broader than correspondence — commonly Schedule A and Schedule C substantiation, filing status, or dependency issues.

Field audits are conducted by a revenue agent at your home, business, or representative’s office. These are the serious ones. Field agents examine books and records rather than isolated line items, and the scope can expand to related returns, related entities, and additional years as the examination develops.

What Draws an Examination

Returns are scored by computer, then screened by people. Recurring triggers include:

• Information return mismatches — W-2, 1099-NEC, 1099-K, and K-1 data that does not tie to the return; these generate automated notices without human review
• Schedule C characteristics — losses across several years, high deductions relative to receipts, large vehicle or travel and meals figures, and cash-intensive operations
• Foreign accounts and assets — FBAR and Form 8938 exposure, and unreported foreign gifts on Form 3520
• Digital assets — exchange reporting on Form 1099-DA, which surfaces basis gaps and unreported dispositions
• Employee Retention Credit claims — a continuing enforcement priority, covered on our ERC audit defense page
• Rental real estate — real estate professional status, material participation, and short-term rental positions
• Large charitable deductions — particularly noncash contributions and appraisal-dependent valuations

How Long the IRS Has

The assessment statute of limitations is three years from filing. It extends to six years where more than 25% of gross income was omitted, and it never expires where the return was fraudulent or no return was filed. Agents routinely request an extension on Form 872 as the three-year date approaches. Signing is sometimes the right call — an expiring statute pressures the agent toward assessing everything in dispute — and sometimes not. It is a strategic decision that should not be made reflexively.

The Sequence, and Where the Decisions Are

Information Document Requests

The examination runs on IDRs — Form 4564 in a field audit. Each is a decision: what is responsive, what is not, and what a document reveals beyond the item under examination. Overproduction is the most common unforced error. Handing over three years of bank statements to answer a question about one deduction invites an examination of every deposit in them.

The other risk is conversational. Agents ask open questions about how the business operates and how records are kept, and those answers become part of the file. Represented taxpayers generally do not attend interviews; counsel appears, which keeps the record narrow and the answers accurate.

The 30-Day Letter and Appeals

If the agent proposes adjustments you do not agree to, the IRS issues a 30-day letter with an examination report and the right to protest to the Office of Appeals.

Appeals is independent of the examination function and is the most productive stage in most cases. Unlike the agent, Appeals can weigh hazards of litigation — the risk the government would lose in court — which permits settlement on a percentage basis that an examiner has no authority to offer. Cases with genuine factual or legal ambiguity frequently settle here at a meaningful discount.

The 90-Day Letter and Tax Court

If no agreement is reached, the IRS issues a statutory notice of deficiency — the 90-day letter. You then have 90 days to petition the United States Tax Court, and this deadline cannot be extended for any reason.

The petition is what preserves the right to contest the liability before paying it. Let the 90 days lapse and the deficiency is assessed; the dispute then requires paying in full and suing for a refund. Many cases petitioned to Tax Court are resolved with IRS counsel without trial, but the petition has to be filed for that conversation to happen.

When an Audit Turns Criminal

Some examinations carry exposure beyond additional tax. Where the facts suggest intentional understatement — unreported cash, two sets of books, false documents produced during the audit, or a pattern of omission across years — a civil examination can be referred to Criminal Investigation.

The warning signs are often procedural rather than explicit: an agent who abruptly stops requesting documents, unexplained delays, or a summons served on a bank or third party. A revenue agent is not required to tell you a referral is being considered.

These are eggshell audits, and they call for a different posture from the outset — attorney-client privilege matters, statements matter enormously, and the accountant who prepared the return is generally not the right person to defend it, because accountant communications are not privileged in a criminal matter. Our page on IRS fraud accusations addresses this directly.

The California Tail

A federal examination rarely ends at the federal level, and this is the part clients most often miss.

When the IRS adjusts your return, Revenue and Taxation Code section 18622 obligates you to notify the Franchise Tax Board within six months. Notify within six months and the FTB has two years to assess. Notify late and it has four. Never notify and the assessment window stays open indefinitely.

The result is a California assessment arriving years after the federal case closed, on adjustments the taxpayer considered long settled, with a state agency that has twenty years to collect rather than the IRS’s ten.

The state consequence is also not always proportional. Because California’s conformity date is January 1, 2025 under Senate Bill 711, it does not follow the One Big Beautiful Bill Act. Federal positions on bonus depreciation, Section 179, and research expensing do not carry to the California return, so a federal adjustment can produce a larger state effect than expected — or a smaller one. Either way it should be modeled while the federal case is still open, not discovered later.

What to Do When the Letter Arrives

Do: confirm the letter is authentic — verify the notice number and call the IRS directly rather than a number printed on a suspicious letter. Note every deadline in the document. Gather the records supporting the specific items identified. Get advice before responding, particularly on a field audit.

Do not: ignore it, since unanswered notices become defaults. Do not send documents beyond what was requested. Do not create, backdate, or alter records to fill gaps — that converts a civil problem into a criminal one faster than anything else. Do not discuss the substance with the agent before you know what the examination is actually about.

Frequently Asked Questions

How far back can the IRS audit me?

Three years from filing, six where more than 25% of gross income was omitted, and without limit for a fraudulent return or an unfiled year.

Should I sign Form 872 to extend the statute?

It depends on the case. Refusing can push the agent to assess everything in dispute before the statute runs; agreeing can allow time to develop a favorable record. It is a judgment call and worth taking advice on.

Can I just have my CPA handle it?

For a straightforward correspondence audit, often yes. But accountant communications are not privileged in a criminal matter, and if the preparer also prepared the return under examination, their interests and yours are not perfectly aligned. Field audits and any case with fraud exposure call for counsel.

What is the difference between Appeals and Tax Court?

Appeals is an administrative settlement forum inside the IRS that can consider litigation hazards. Tax Court is a federal court, reached by petitioning within 90 days of a statutory notice of deficiency, and it lets you contest the liability without paying first.

Will an IRS audit trigger a California audit?

Frequently. The IRS and FTB share information, and you are separately required to report federal adjustments to the FTB within six months. Failing to report leaves the California assessment window open indefinitely.

What if I cannot pay what the audit determines I owe?

Resolution options are separate from the audit itself — installment agreements, currently not collectible status, penalty abatement, or an offer in compromise. Reducing the assessment first is nearly always cheaper than settling an inflated one.

Get Representation Early

The cheapest point to involve counsel in an examination is at the first letter, before the record has been built by someone without a strategy. The most expensive is after a 90-day letter has been ignored.

Pietro Canestrelli holds an LL.M. in Taxation and represents clients in IRS examinations, Appeals, and Tax Court, and before the FTB, CDTFA, EDD, and the Office of Tax Appeals. Schedule a consultation, or read more about our IRS representation and tax relief services.