IRS Examinations: Correspondence, Office, and Field Audits

A federal examination is a review of a filed return to test whether what it reported is right. It arrives in one of three formats — a letter asking about one or two items, an appointment at an IRS office, or a revenue agent visiting the place where the books are kept — and the format signals how much of the return is in play. In every format the taxpayer may be represented, may decline to answer on the spot, and may take an unagreed result to the Independent Office of Appeals and then to the United States Tax Court.

1.How a return comes to be examined

Selection is mostly mechanical. Computer scoring compares a return against statistical norms for similar returns and flags outliers. Separately, information returns filed by third parties — employers, brokers, payment processors, banks — are matched against what the taxpayer reported, and a mismatch generates an automated notice. Some examinations begin because a related taxpayer was examined: a partnership adjustment reaches the partners, and an examination of one business can reach its owners.

The IRS generally has three years from the filing of a return to assess additional tax. That period stretches where a substantial amount of gross income was omitted, and there is no limit at all where a return was never filed or where the return was fraudulent. Because the timing question shapes everything else, it is worth fixing at the outset which years remain open.

2.The three formats

Most examinations are correspondence examinations, and most of those are narrow. The common failure in that format is not legal but logistical: mail is missed, deadlines pass, and an adjustment becomes final by default. A correspondence audit that goes unanswered produces the same assessment as one that was answered badly.

3.Representation and the conduct of the interview

A taxpayer may be represented by an attorney, a certified public accountant, or an enrolled agent, each of whom is authorized to practice before the IRS. Authority is granted by a signed power of attorney filed with the agency. Once it is on file, the representative receives the correspondence and may attend without the taxpayer, and an examiner who nonetheless deals directly with the taxpayer can be redirected.

The taxpayer may also stop an interview to consult a representative, and may make an audio recording of an in-person interview after giving advance notice, with the IRS entitled to record as well. These are procedural rights, published by the agency on its examination pages, and asserting them is not treated as evidence of anything.

Caution: An examiner may ask the taxpayer to sign a consent extending the assessment period. Signing keeps the year open; refusing usually prompts an immediate notice of deficiency on the examiner's current view of the facts. Neither choice is automatically right, and the consent can often be limited to particular issues or a fixed date.

4.What the examination produces

1. An information request. The examiner lists documents and explanations wanted. Producing organized, indexed records shortens everything that follows, which is the practical argument for the habits described in business expense and home office deductions.
2. A proposed adjustment. The examiner writes up each change and the reason for it. Some items are conceded once documents appear; others are genuine disagreements about law.
3. An agreed or unagreed report. Signing the agreement form ends the examination and permits immediate assessment. Declining to sign leaves the matter unagreed.
4. A letter proposing the adjustment. An unagreed report is usually followed by a letter giving a set period to request Appeals — commonly called a thirty-day letter after the response window it states.
5. A notice of deficiency. If the matter is still unresolved, this statutory notice issues and starts the Tax Court clock.

5.Appeals, the ninety-day notice, and the state layer

Appeals is a separate office within the IRS, staffed by officers who did not work the examination. Its function is settlement: it weighs the hazards of litigation, which means it can concede an issue the examiner would not, on the basis that the government might lose it in court. Conferences are informal, and a representative may appear alone. The office's role and how to request a conference are described on the Appeals pages.

If no agreement is reached, the notice of deficiency issues. It gives ninety days — longer if the notice is addressed to a person outside the United States — to file a petition in the Tax Court. The number matters more than any other in the examination process, because the petition is the one route to judicial review before paying. File it and the tax cannot be assessed or collected while the case is pending. Let the period lapse and the tax is assessed, after which the only judicial route is to pay the tax, claim a refund, and sue in a district court or the Court of Federal Claims. Once assessed, the balance enters the collection system described in federal tax liens and levies.

A separate point about spouses: an examination of a joint return produces a deficiency both signers owe in full. Where one spouse had no knowledge of the item causing the adjustment, the routes in innocent spouse relief run on their own timetable, which can expire while the examination is still under way.

State examinations are separate

Everything above concerns federal income tax. State revenue departments run their own examination programs under their own procedures, with their own appeal bodies and their own courts. Two features connect the systems. First, most states with an income tax require a taxpayer to report a final federal adjustment to the state within a set period after it becomes final, and the state's own assessment period for that adjustment often runs from the report rather than from the original filing. Second, many states receive federal adjustment data directly. A federal examination that ends in an adjustment should therefore be assumed to have a state consequence, and the state deadline for reporting it is easy to miss because no state notice prompts it.

6.Questions this raises

Does an audit mean the IRS suspects fraud?

Rarely. Most examinations are generated by computer scoring or by a mismatch between a return and a third-party information report, without any human deciding that something is wrong. Fraud investigations are handled by a different function and look different — different personnel, different warnings. If an examination shifts in that direction, the right response is to stop answering questions and obtain counsel immediately.

What happens if I simply cannot find the records?

Say so, and reconstruct what you can. Bank and credit card statements, vendor duplicates, calendars, and contemporaneous emails all carry weight. Some deductions are governed by strict statutory substantiation rules where reconstruction will not save them, but many are not, and an examiner has discretion to accept credible secondary evidence. Silence is worse than an imperfect reconstruction offered with an honest explanation.

Can I skip Appeals and go straight to court?

Yes. Appeals is optional; the notice of deficiency and the Tax Court petition are the path that matters legally. Skipping it is usually a mistake, because Appeals settles a large share of cases without the cost and formality of litigation and can concede issues on litigation hazards alone. A case that fails there can still be petitioned to the Tax Court afterward.

The examination is dragging on with no contact. Is there anything to do?

Ask the examiner's manager first; the chain of supervision is available on request and often unsticks a file. Where a delay is causing real hardship or the normal channels have failed, the Taxpayer Advocate Service operates independently of the examination function and can issue an order directing the agency to act. Keep a written record of each attempt to make contact.

7.Handling an examination in order

Read the notice for what it actually asks. A correspondence audit questioning one deduction does not invite a defense of the whole return. Answer the question posed, in writing, by the stated date, and keep proof of what was sent and when. If the format is an office or field examination, put a power of attorney on file before the first meeting so that correspondence and questions route through the representative.

• Confirm which years are open before conceding anything about an older one.
• Produce documents in an indexed set, with a short cover explanation of what each proves.
• Distinguish factual disputes, which documents resolve, from legal disputes, which they will not.
• Diary the response date on every letter, and the ninety-day date the moment a notice of deficiency arrives.

If the outcome shows an error in your favor on a year not under examination, the correction runs through amending a return and is bounded by its own limitation period. If the process itself breaks down, the independent office described on the IRS Taxpayer Advocate pages exists for exactly that situation.