Key Takeaways
- Audits can be correspondence, office, or field exams.
- Correspondence audit: Handled by mail (most common, simplest).
- Office audit: Taxpayer visits IRS office.
- Field audit: IRS visits taxpayer (most comprehensive).
- The "30-Day Letter" gives 30 days to request Appeals.
- Fast Track Settlement (FTS) allows mediation during the audit.
Representing Clients in Audits (Examination)
Why This Matters for the Exam
The audit process is a core topic for Part 3. The exam tests your knowledge of audit types, the representative's role, and the critical 30-Day Letter that triggers Appeals rights.
Expect at least 3-4 questions on audits, the 30-day letter, and Fast Track Settlement.
What Is an Examination (Audit)?
An examination (commonly called an "audit") is the IRS's process of verifying the accuracy and completeness of a tax return. The IRS may:
- Request documentation to support claimed deductions or credits.
- Verify income reported matches third-party information returns.
- Adjust the return based on findings.
Types of Audits
| Audit Type | Location | Complexity | Scope |
|---|---|---|---|
| Correspondence Audit | By mail | Simple | 1-2 issues (specific line items) |
| Office Audit | IRS office | Moderate | Multiple issues |
| Field Audit | Taxpayer's location | Complex | Full business examination |
Correspondence Audit:
- Most common type.
- IRS sends a letter requesting documentation (e.g., proof of charitable deductions).
- Taxpayer responds by mail with supporting documents.
Office Audit:
- Taxpayer or representative meets at an IRS office.
- Examines multiple items but not the entire return.
- Common for itemized deductions, business income issues.
Field Audit:
- IRS revenue agent visits the taxpayer's home or business.
- Most comprehensive—examines books, records, and operations.
- Common for businesses, high-income individuals, complex returns.
The Representative's Role in an Audit
With a valid Form 2848, an EA/CPA/Attorney can:
| Action | Authority |
|---|---|
| Attend meetings | Represent at all IRS conferences |
| Provide documents | Respond to Information Document Requests (IDRs) |
| Negotiate | Discuss findings and proposed adjustments |
| Advocate | Present facts and legal arguments |
| Sign waivers | Extend statute of limitations if needed |
Key Point: The representative advocates for the taxpayer but cannot change the facts. The goal is to ensure the IRS has complete and accurate information and that the law is correctly applied.
The "30-Day Letter" (Preliminary Notice)
If the IRS proposes changes the taxpayer disagrees with, it issues a 30-Day Letter (also called an Examination Report or Revenue Agent Report).
30-Day Letter Contents:
- Proposed adjustments (changes to tax owed).
- Explanation of IRS findings.
- Instructions for agreeing or disagreeing.
Taxpayer Options (within 30 days):
| Option | Result |
|---|---|
| Agree | Sign the report; assessment is made |
| Request Appeals | File a protest; case goes to IRS Office of Appeals |
| Do Nothing | IRS issues a 90-Day Letter (Statutory Notice of Deficiency) |
Protest Requirements
The type of protest depends on the amount at issue:
| Amount | Protest Type |
|---|---|
| ≤ $25,000 | Small Case Request (brief written statement) |
| > $25,000 | Formal Written Protest (detailed legal arguments) |
A formal protest must include:
- Statement that you want to appeal.
- Copy of the 30-day letter.
- Tax years/periods involved.
- Itemized adjustments you disagree with.
- Facts and law supporting your position.
- Penalties of perjury statement.
Fast Track Settlement (FTS)
Fast Track Settlement is an alternative dispute resolution program that allows taxpayers to resolve issues during the audit with the help of an IRS Appeals mediator.
Benefits:
- Faster resolution (often within 60 days).
- Avoids formal protest and Appeals process.
- Non-binding—taxpayer can still go to Appeals if FTS fails.
Real-World Scenario
Scenario: Your client receives a 30-Day Letter proposing a $15,000 adjustment for disallowed business expenses. The facts support the client's position.
- Option 1: Request Appeals. File a Small Case Request (≤ $25,000). Explain why the expenses are valid business deductions.
- Option 2: Request Fast Track Settlement. Work with an Appeals mediator to resolve the issue faster.
- Do NOT: Ignore the letter—that leads to a 90-Day Letter and Tax Court deadline.
On the Exam
Expect 3-4 questions on audits, typically:
- Audit Type Questions: "Which audit involves an IRS visit to the taxpayer's business?"
- 30-Day Letter Questions: "What is the purpose of the 30-Day Letter?"
- Protest Questions: "What type of protest is required for disputes over $25,000?"
- FTS Questions: "What program allows mediation during the audit?"
The key is to remember: Correspondence/Office/Field audits. 30-Day Letter = 30 days to Appeals. Fast Track = mediation at audit level.
What is the primary purpose of a "30-Day Letter"?
Which program allows mediation of unagreed issues during the audit process?
Which type of audit involves an IRS revenue agent visiting the taxpayer's business?