An IRS Revenue Agent Report (RAR) is a document prepared by a revenue agent, which is a type of IRS employee who is trained to audit tax returns and determine the accuracy of the information provided. 

If you are the subject of an IRS audit and receive an RAR, it is important to carefully analyze the report in order to understand the issues being raised and determine the best course of action.

In this article, we will provide an overview of the process for analyzing an RAR, including reviewing the findings and determining any potential implications for your tax liability. Understanding the content of the RAR and the audit process can help you to effectively respond to the audit and minimize any potential tax liability.

Let’s dive in.

What is an IRS Revenue Agent Report?

The Revenue Agent’s Report is a detailed document describing an IRS examiner’s audit findings. Additionally, the Revenue Agent Report states “the amount of deficiency or refund the agent finds the taxpayer to owe or be owed, respectively.”

Taxpayers have the right to disagree with a revenue agent’s report. If taxpayers disagree, they can challenge the agent’s findings through:

  • A formal protest to the IRS Office of Appeals division by appealing to the U.S. Tax Court, or
  •  Paying the new assessment but then suing for a refund.

If the Revenue Agent Report is unchallenged or upheld, delinquent taxpayers may be subject to increased fines or jail time if they fail to reconcile their tax situation.

Every IRS audit concludes with a Revenue Agent Report which includes all the findings the IRS made based upon the documents and information collected, and the determination IRS has made. 

An IRS audit starts with an initial audit letter sent to the taxpayer (in the case of our clients, the business owner). Then the IRS will send an IDR, also called an Information Document Request with a list of documents and information the IRS needs.In some cases a business owner might receive more than one IDR.

The next step is to provide documents and negotiate, communicate with your revenue agent and comply with additional requests for information. At the end of the audit, you will receive a Revenue Agent Report. 

Sections of the Revenue Agent Report

Let’s review the sections of the Revenue Agent Report, so you understand where the information is and how to read it. 

Adjustments to Income

The first section of the RAR is adjustments to income. This includes anything from income, additional income the IRS found, or even a reduction of income. 

Usually, IRS finds additional income. Additionally, the section will include any other adjustments to expenses and potentially even net operating losses. 

Corrected Tax Liability

The next section of the RAR is the corrected tax liability. shows the correct amount of tax that the IRS believes you owe, based on the audit findings. This may be different from the amount of tax that you originally reported on your tax return. The corrected tax liability is calculated by adding any additional tax that the revenue agent determined you owe, subtracting any overpayments that the agent found, and making any necessary adjustments to your tax return.

The balance at the bottom of the RAR reflects the total amount of tax that you owe, including any interest and penalties that may have been assessed. It is important to carefully review the corrected tax liability and balance sections of the RAR, as they will provide important information about the tax implications of the audit and any action you may need to take.

If you disagree with the corrected tax liability or the balance, you can contest the findings and seek to resolve the matter through the IRS appeals process.

Expenses

After the adjustments to income,  you’ll find expenses. The expenses on your return are negative, they offset income. If IRS disagrees as to an item of an expense, it will be listed as a positive number to offset the negative number. 

Balance

Below the corrected tax liability and credits, the Revenue Agent Report will list the balance at the bottom of the first page. 

This balance does not include penalties and interest. 

Penalties

The top of page two of the Revenue Agent Report lists the penalties that the IRS has assessed based on the audit findings. Penalties may be assessed for a variety of reasons, such as filing a tax return late, making payments late, or failing to keep adequate records.

One type of penalty that may be assessed is the negligence penalty, which occurs if the IRS determines that you kept poor records and did not have sufficient substantiation for your claims. This penalty may be assessed if the IRS determines that you made errors on your tax return due to a lack of attention or care, rather than an intentional effort to evade taxes.

The IRS may also assess a fraud penalty if they believe that you deliberately and willfully failed to file a tax return on time or deliberately understated your income or overstated your expenses in order to evade taxes. Fraud is considered a more serious offense than negligence and may result in more severe penalties. 

It is important to carefully review any penalties listed in the RAR and understand the reasons for their assessment in order to respond appropriately and contest any penalties that you believe are incorrect.

Section 3: Interest and Total Balance

The section on page two of the Revenue Agent Report that lists interest and the total balance is an important part of understanding the tax implications of the audit. Interest is typically assessed from the date that the tax payment was due, which is usually April 15th for individuals and March for corporations.

The RAR may include a broad description of why the full expense was not allowed or why the tax payment was not satisfied. In some cases, the revenue agent may provide more detailed information about the audit findings in the work papers that were used to prepare the RAR. If you want more detail about the audit findings, you can request that the revenue agent provide the work papers to you. These papers may include a factual summary of the information that was exchanged between you and the IRS during the audit process. Having access to this information can be valuable in helping you to understand the audit findings and respond appropriately.

Recommendations

The final section of the Revenue Agent Report is called “Recommendations.” In this section, the revenue agent will list their recommendations for how to resolve the findings. These recommendations are non-binding, but they can be helpful in negotiating with IRS.

Final Thoughts

If you believe that the revenue agent overlooked some facts and you have some substantiation that’s not being considered by the revenue agent, you should consider communicating with the supervisor and try to get the supervisor involved. File a protest letter within the deadline. 

Consider enlisting the help of an experienced tax attorney to navigate the complex situation and efficiently resolve any issues with IRS. 

At Milikowsky Tax Law, we have over a decade of experience working with IRS audits and are experts in defending business owners in the face of IRS or other government agency audits.

Read on to learn how to respond to an IRS audit in 2022.

How to prepare an IRS Bank Deposit Analysis

The bank deposit analysis is essential to every single IRS audit. 

An IRS Bank Deposit Analysis is a tool used by the Internal Revenue Service (IRS) to help determine whether an individual or business has accurately reported their income on their tax returns. Preparing an IRS Bank Deposit Analysis involves gathering and organizing financial records, including bank statements and other documentation of deposits made into your account(s). 

This process can be time-consuming and may require some effort, but it is important to accurately report your income to the IRS to avoid potential penalties and fines.

In this article, we will provide an overview of the steps involved in preparing an IRS Bank Deposit Analysis and offer some tips for making the process as smooth as possible. Let’s begin with reviewing what an IRS bank deposit analysis includes.

What is an IRS Bank Deposit Analysis?

A bank deposit analysis is where the IRS will analyze all the deposits coming into a bank account that you own, either personal or business, and determine whether those deposits are taxable or non-taxable income. 

It can be difficult to determine the source of cash deposits, as it is not always clear whether the money was received from the sale of a car or from wages earned through work. As a taxpayer or business owner, it is your responsibility to provide documentation to establish the origin of income and determine whether the deposit is considered non-taxable. It is important to accurately report all income to the Internal Revenue Service (IRS) to avoid potential penalties and fines.

How to Start Preparing for an IRS Bank Deposit Analysis

Here are some steps you can follow to prepare an IRS Bank Deposit Analysis:

Gather financial records: Start by gathering all relevant financial records, including bank statements and any other documentation of deposits made into your account(s). This may include pay stubs, invoices, receipts, and other documentation that supports the sources of the deposits.

Organize the records: Next, organize the records in a way that makes it easy to review and analyze the deposits. This may involve sorting the records by account, timeframe, or source.

Calculate the total deposits: Using the financial records, calculate the total amount of deposits made into the account(s) being analyzed.

Identify the sources of the deposits: Determine the sources of the deposits, such as wages, self-employment income, rents, and other sources.

Determine the taxability of the deposits: Review the documentation provided and consider the taxability of the deposits based on the source of the funds and any applicable tax laws.

Prepare the analysis: Using the information gathered, prepare the IRS Bank Deposit Analysis by completing all relevant sections, including a summary of deposits, a breakdown of deposits by source and account, and any supporting documentation.

The IRS Bank Deposit Analysis Process: How It Works

Let’s dive into the key considerations surrounding the IRS Bank Deposit Analysis process. This includes an overview of how the process operates, as well as the types of information that may be requested from taxpayers in the course of the analysis.

Sources of Income

It may be difficult to determine the source and taxability of certain types of income, such as funds transferred from a credit line or money received from escrow. In these cases, it may be necessary to provide additional documentation or seek clarification from the source of the funds to establish the origin of the income and determine its taxability. 

If you receive a check and a copy of it from the IRS, you can use the information on the check to understand where the money is coming from and whether or not it is taxable. It might be helpful to contact the person who wrote the check to confirm the source of the income and why you received it.

Determining Income

The Bank Deposit Analysis is an essential part of every single IRS audit because determining income is essential to every single IRS audit. 

Upon completion of the IRS Bank Deposit Analysis, the IRS will prepare a work paper that compares the total deposits identified in the analysis to the income reported on the individual or business’s tax return. If there is a discrepancy between the two, especially if there is an increase in the total deposits, the IRS may assess additional taxes based on the increase in income. 

This process may be repeated for each year being audited. It is important to accurately report all income on tax returns to avoid potential assessments of additional taxes and penalties.

Additional Years

If IRS selects the first year for audit as a test year and discovers unreported income, it is likely that additional years will also be audited. However, if the amount of unreported income is relatively small or insignificant, IRS may not conclude that the same errors are occurring in other years. It is important to accurately report all income on tax returns to avoid potential assessments of additional taxes and penalties.

Be Careful with Cash

During an IRS audit, it is advisable to devote significant attention to the Bank Deposit Analysis and maintain thorough records, particularly when depositing cash. It can be difficult to trace the source of cash deposits, so it is important to document the origin of the funds through photocopies of checks, contracts, or other relevant documentation. 

Additionally, making a note of the source of cash deposits, such as the sale of a car or the receipt of a contract payment, can help to explain and potentially resolve any issues with the IRS. Accurate record-keeping is crucial in the event of an IRS audit to ensure that all income is accurately reported and to avoid potential assessments of additional taxes and penalties.

Still Have Questions?

Business owners should contact Milikowsky Tax Law if they have any additional questions about how to navigate the IRS audit process.

At Milikowsky Tax Law, we have over a decade of experience working with IRS and tax audits. We’re experts in defending business owners in the face of IRS or other government agency audits.

Interested in learning more? Read on to learn how to respond to an IRS audit.

How to Abate an IRS penalty

There are a lot of different types of penalties IRS can assess. Let’s start with the failure to file. 

Typically, it’s a firm deadline and when you have to file a return. If you don’t file an extension and your return is late, or you do file the extension and your return is late, you’ll get a notice from the IRS that you have a late return. Even if you have a good excuse you will have to substantiate it with documents and evidence of reasonable cause.   

Some examples of excuses that don’t work on the IRS:

Saying your CPA promised to file the return on time and they missed the deadline. Simply indicating to the IRS that you had a CPA that missed a deadline is not enough, because IRS feels that it is your responsibility, not the CPA’s to know when to file the return.  If it’s something more of a technical nature and you file the return with an error on it, and it’s really more of a legal question or super technical tax question, if you get a penalty for that for misreporting something, you might be able to argue reasonable cause because you relied upon a tax professional. Get a letter from your CPA, tax attorney, or whoever gave you the advice in question, and IRS will then consider that and potentially, abate the penalty  

What does it mean to abate a penalty? 

Removing the penalty in the terminology of the IRS is abating the penalty. When requesting penalty relief, that is what you want to ask for, “penalty abatement”.  Missing a filing deadline is very difficult. We had a client for whom we were able to get an abatement fro for a missed deadline, but you really have to show that even though you took all reasonable measures and acted like a prudent person, you still couldn’t meet the deadline.  There have been cases of people that have been incarcerated, out of the country, and a number of other excuses that do not qualify. Because you can always file a tax return with the US Embassy in a foreign country.   

Carefully consider what the facts are and respond to the notice even if you don’t have a good reason for your missed deadline. 

  Always be truthful, gather your evidence, provide your documents. Third-party records are better if somebody can substantiate,your evidence with a declaration or a note from that person.  Be sure to respond within the correct timeframe. In the notice, it’ll indicate how much time you have to respond. It’s typically 30 days, but it could be as short as 15 days or even less. Different penalty notices have different deadlines. Make sure you don’t miss that deadline on top of the missed deadline for which you have been assessed a penalty.   

Asking for more time from IRS 

If you got the letter or notice late, or you just are unable to gather the evidence in time but you really do want to respond, you can write a letter to the IRS requesting an extension to respond to the penalty notice. The extension is not guaranteed, IRS can still deny your request and assess the penalty. But if you are in a bind, and you want more time, it can’t hurt to request additional time. Typically they will grant you an extension.   

Keep supporting evidence of correspondence

Post-COVID, IRS is so far behind on mail that they might actually generate a notice indicating you didn’t respond to the penalty letter and assess it to you, even though you did send a letter before the deadline. So be cognizant of that and register the mail you send, take a time-stamped picture of the correspondence or find a fax number. Faxing to the IRS is the quickest way for them to get the notice (don’t forget to keep your fax confirmation). Whether you respond to the penalty notice or you ask for additional time, send a certified US mail with a return receipt as well as a fax. And if you don’t have a fax number on the notice, you can contact IRS directly and ask them if there’s a fax number for the department that generated the notice.   
Attorney reviews options for handling back taxes
Many people don’t know the options that are available to them when dealing with back taxes and the IRS.  Back taxes are a nightmare for anyone that owes the IRS money without the means of paying it. If you are already in debt, the IRS banging on your door doesn’t help your situation—it just makes it more stressful.  If you owe a lot of back taxes, you don’t have to panic; you have options. Let’s discuss.

First, What Are Back Taxes?

Back taxes are “taxes that have been partially or fully unpaid in the year that they were due. Taxpayers can have unpaid back taxes at the federal, state and/or local levels. Back taxes accumulate interest and penalties on a regular basis.”

Understanding Back Taxes

Back taxes refer to taxes owed from a prior year.  A taxpayer may be behind in paying taxes for intentional or unintentional reasons. Some of these reasons include:
  • Filing a return and failing to pay the tax liability
  • Failing to report all income earned during the tax year
  • Neglecting to file a tax return

What Happens if a Taxpayer Doesn’t Pay Back Taxes?

Unpaid back taxes can be a serious issue for many taxpayers who don’t have the means to pay them.  If a taxpayer does not pay back taxes they owe, they can face a range of consequences from the government. Some strategies the government may use to get a taxpayer to pay back taxes include:
  • Pressing charges
  • Demanding the taxpayer pay immediately 
  • Offer a voluntary disclosure program (to help avoid criminal charges)
  • Offer payment options
If back taxes are not paid, some consequences may include IRS:
  • Seizing property
  • Seizing assets
  • Placing liens on the property
  • Placing a federal tax lien to inform other creditors of the taxing authority’s legal right to a taxpayer’s assets and property.
  • Garnishing a taxpayer’s wages and to levy their financial accounts, seizing up to the total amount of taxes owed. 
Failure to pay taxes can also involve imprisonment. However, if you owe back taxes, you don’t need to panic. Let’s take a look at some of your options. 

What Are Your Options For Handling Back Taxes?

Some solutions our San Diego back tax attorneys can provide include:

A Payment Plan 

Agreeing on a monthly payment amount that is feasible and not strenuous can make all the difference. Our tax lawyer can help facilitate an agreed amount that works for both you and the IRS.

An Offer in Compromise 

An offer in compromise allows you to settle your debt with the IRS for much less than what you owe.

Declaring Non-Collectible

When you declare non-collectible, the IRS immediately stops trying to collect from you for approximately one to two years.

Abatement of Penalties

Through this method, you can seriously reduce the amount you owe the IRS, by reducing the costs of the penalties and interest against you.

Contact Milikowsky Tax Law

If the IRS is telling you to pay your back taxes in a payment plan you can’t afford, contact our San Diego back tax lawyer today. Our legal team at Milikowsky Tax Law is well-versed in tax law procedures and options; we are ready to assist you through this difficult time.  Our committed tax law firm can answer your questions, explain your options, and guide you towards the best game plan for you. At Milikowsky Tax Law we are experts in providing legal counsel for dealing with unpaid taxes.
Before responding to an IRS audit letter, first identify the following five things: the taxpayer, revenue agent, tax years audited, triggering issue(s), and the deadline.
As a small business owner, you may be wondering what the process is for an IRS audit. An IRS audit is when IRS reviews your tax return to ensure that you have reported your income and expenses correctly. The founder of Milikowsky Tax Law, John Milikowsky, breaks down the process of an IRS audit for small business owners. Check out the video below for more information:
In this article, we will review the various stages of an audit as well as information you can obtain from IRS during an audit to ensure that your tax return is correct. 

The IRS Audit Process

The process of an IRS audit can feel overwhelming for a small business owner. However, it doesn’t have to be. Let’s take a look at each step of the process.

The Audit Letter

An IRS audit starts with an audit letter that is generally sent to the business owner or taxpayer. This letter will include:
  • The name of the assigned revenue agent
  • The telephone number and fax number of the revenue agent
  • The number of days you have to respond to the revenue agent
Business owners should pay careful attention to the number of days they have to respond to the revenue agent. This is important in continuing the audit process efficiently and cooperating with IRS. 

What If You Need More Time to Provide Information to IRS?

It is important to respond to the audit letter, even if just to request more time. If you do need more time, you can request an additional 30 or 60 days. Typically, they’ll give you 30 days to respond, have an interview, and meet.  During this time, you will want to consider hiring a professional to help guide you through the audit process.

Consider Hiring a Tax Attorney or CPA

As you collect information for IRS, you can choose to enlist the help of an experienced tax attorney or a CPA. We’d recommend a tax attorney because any communication you have between your attorney is protected under attorney-client privilege, whereas it’s not protected by any other tax professional or CPA. 

Initial Document Request

If you’re being audited by IRS, one of the first things they’ll do is send you an Initial Document Request (IDR). This request will list all of the documents and information that the revenue agent needs in order to complete the audit.  If you don’t provide this information, IRS can summon the information. For instance, if you don’t provide your bank statements, IRS can go directly to your bank to obtain them. If this occurs, within 30 days, IRS can obtain your bank statements, canceled checks, and deposited items. 

Second Initial Document Request

After you respond to the IDR, IRS will have another discussion. If IRS does not feel that they have all the information they need or if you failed to provide all requested information, they can issue an additional Initial Document Request. This process can continue with as many document requests as they need based upon the number of alleged issues on your tax return. And if they don’t feel that you provided all the information, they’ll issue another IDR, typically IDR Number Two, and it could go up to as many IDRs as they need based upon the number of issues that they’re looking at on your tax return. 

Interviews With the Taxpayer

After you provide all necessary information to IRS, they will typically conduct an interview. At Milikowsky Tax Law, we attempt to schedule the interview at the end of the audit or not have one at all. That being said, sometimes it is an unavoidable step in the process. 

An Interview May Come With a Summons

If IRS wants to interview you and it is an important part of their audit, they can submit a summons. If you disregard this summons, IRS can file an action in the federal court to require you to appear and provide the documents or any other testimonial information. This step depends upon how important an interview is to resolve the audit.

Revenue Agent Report

After the business owner and IRS have exchanged information through the audit letter, IDR(s), and an interview, taxpayers will typically receive a Revenue Agent Report (RAR). The Revenue Agent’s Report is a detailed document describing an IRS examiner’s audit findings.  Additionally, the Revenue Agent’s Report states “the amount of deficiency or refund the agent finds the taxpayer to owe or be owed, respectively.” Learn more about how to read a Revenue Agent Report, here.

Audit Conclusion: Respond to the Revenue Agent Report

Typically, a business owner will have 30 days to respond to the Revenue Agent Report. It might be less time, especially if there have been multiple Revenue Agent Reports. Taxpayers have the right to disagree with a revenue agent’s report. If taxpayers disagree, they can challenge the agent’s findings through:
  • A formal protest to the IRS Office of Appeals division by appealing to the U.S. Tax Court, or
  •  Paying the new assessment and then suing for a refund.
If the Revenue Agent’s Report is unchallenged or upheld, delinquent taxpayers may be subject to increased fines or jail time if they fail to reconcile their tax situation.

Facing an IRS Audit?

If you or someone you know received an audit letter from IRS, reach out to our team of experts at Milikowsky Tax Law. We have over a decade of experience working with IRS audits and are experts in defending business owners in the face of IRS or other government agency audits. Have more questions about IRS audits? Check out our full guide, here.
Can IRS summons your bank records
The Internal Revenue Service (IRS) has the power to investigate the finances of a taxpayer if they believe the taxpayer is withholding assets. One tool IRS uses to do this is a bank summons, which is a legal document that requires your bank to provide your bank statements, account balance, and other information to IRS. John Milikowsky, the founder of Milikowsky Tax Law, explains how IRS can summon your bank account records. Check out the video below for more information.
 
  • When IRS can summon bank records, and
  • Notices that a taxpayer is given regarding access to their bank records

Can IRS Summon Your Bank Records?

The short answer is yes. IRS can look over bank records if it believes you are withholding assets.

What is an IRS Summons?

An IRS summons is a legal document that orders a person or entity to appear before IRS to provide testimony or to turn over specified documents or records. The summons will typically include:
  • The name of the person or entity being summoned
  • The reason for the summons, and
  • The date by which the person or entity must respond

Does IRS Summon Bank Records Often?

IRS does typically summon bank records. Therefore, taxpayers should be prepared to provide this information.

Who Does IRS Issue a Summons to?

IRS can send the summons to third parties, and they don’t need a court order to do so. If IRS issues a summons, it can be to:
  • A bank
  • A business associate
  • A company you did business with
  • And more
While there is summons associated with expenses, these requests are typically associated with income. For example, at Milikowsky Tax Law, we have seen some clients deduct a large amount for rent. Then, summonses go out to the landlord to request all the copies of checks that you have paid for rent to your landlord. This request was so IRS could determine where the source of their income was coming from. A situation like this may occur if income is an issue in your audit and IRS sees a lot of expenses being paid, but they don’t see those expenses running through your bank account. The purpose of this request is to see if a taxpayer has another bank account that they have not disclosed.

Is IRS Required to Give Notice When Requesting a Summons?

IRS is not required to give notice before summoning your bank records. However, most of the time they will provide notice. This notice includes information on how to object to the summons and/or provide information on IRS’s investigation.

Do Taxpayers Have to Provide Their Bank Information?

Some taxpayers may not intend to give over their bank statements or produce all of their bank records, canceled checks, and deposit items. However, taxpayers should be prepared to do so; IRS does not have to go to court to get a summons. An IRS revenue agent can issue a summons and send it to your bank, and within 30 days, they will be sent your records from the bank (if the accounts are available).

How Far Back Can IRS Summon Bank Records For?

IRS has a statute of limitations for an audit of three years from the date the return was filed or two years from the date the tax was due, whichever is later. IRS typically conducts audits less than three years from the date of filing, because there’s a statute of limitations; IRS has three years to audit you, and that’s three years from the date you file your return typically. It can be extended if IRS finds a gross understatement of tax. In this circumstance, the limitation could be increased to five years. If fraud is present, there’s no statute of limitations.

Can IRS Access Your Bank Records Without Your Permission?

In some cases, IRS may be able to get your bank records without your permission. This usually happens when IRS is investigating conceivable criminal activity.  However, even in these cases, IRS is required to give you notice before they obtain your bank records.

How Does the Process of an IRS Summons For Bank Records Work?

The Initial Document Request

If you’re being audited by IRS, they’ll send you an initial document request. This request will list all of the documents and information that the Revenue Agent assigned to your case needs to complete the audit. There will likely also be a request to include business bank records. If you don’t respond to that request, IRS can send summonses out.

A Copy of the Summons

Usually, when IRS sends out a summons, they provide you with a copy.

Communication with a Revenue Agent

Typically, when we work audits, we request a revenue agent contact us before they send the summons out. Now, it’s not IRS’s obligation to wait to send the summons out if we request that we work with them and first provide those documents.

Have Questions About Whether or Not IRS Can Summons Your Bank Account?

If you have any questions about whether or not IRS can summon your bank records, you should speak with a professional tax attorney. They will be able to advise you on your specific situation and help determine the best course of action.

The Bottom Line

In summary, IRS can summons your bank information and send the summons to third parties without a court order. They can summons any type of information because the powers of IRS are fairly broad to collect and investigate anything connected with income and expenses that are reported on your tax return.

Consider Milikowsky Tax Law

At Milikowsky Tax Law, we have over a decade of experience working with IRS and tax audits and are experts in defending business owners in the face of IRS or other government agency audits. Read on to learn how to respond to an IRS audit in 2022.
What to do if IRS Audits your Business

Business owners may not be sure where to start if IRS audits their company. However, an IRS audit doesn’t have to feel stressful or disorganized. In this article, we’ll discuss a set of steps business owners can take if they find out they are being audited by IRS. 

Familiarize Yourself With Common Audit Triggers

The first question many business owners may have when being audited is simply: why is IRS choosing to audit my business? By knowing and understanding common audit triggers, taxpayers can understand how to prevent future audits as well as gain more insight into what caused this audit to occur.

Businesses are more susceptible to an audit if they:

  • Have foreign assets 
  • Have a cash business 
  • Are self-employed 
  • Have a home-based business 
  • Claim a disproportionate number of deductions 
  • File incorrect or incomplete returns 
  • Have a large number of cash transactions 
  • Earn less than $25,000 or more than $500,00
  • File a Schedule C 
  • Claim a vehicle as 100% business expense 
  • File taxes late

Review the Audit Letter Carefully

Take time to fully read the audit letter and consider hiring a professional, such as a tax attorney, to help walk you through it. The letter and accompanying information request packet will notify you as to what entity is being audited (business or personal) what year(s) are under review and who your auditor is. 

*Taxpayers should note that IRS does not send emails or phone messages to notify taxpayers of an audit. These types of communication may be a scammer attempting to retrieve personal information or data.

Understand the Type of Audit IRS is Conducting

IRS defines an audit as “as a review and examination of an organization’s or individual’s accounts and financial information to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct.”

IRS has several different ways of auditing businesses. There are two primary forms of audits: correspondence and field audits.

Correspondence Audits

Correspondence audits are the most common type of audit. This form of audit is generally considered to be easier to navigate than a field audit. Why? A correspondence audit occurs when there are errors on the business owner’s tax returns and IRS identifies these errors.

As a response, IRS sends a letter that describes each of these mistakes in detail. The business owner can respond and correct or explain the error through sending additional information to IRS.

Field Audits

A field audit is more thorough than a correspondence audit. Auditors will visit a business site in person. In this case, the auditor will examine financial records and compare them to the business owner’s return.

Prepare the Paperwork

IRS should list the information it requires in your audit letter. Once you know what information IRS needs, you can collect all of the records and supporting documentation requested (but nothing additional). For example, you may need to submit records such as:

  • Bank statements
  • Receipts from vendors, and businesses you have worked with
  •  Invoices 
  • Pay stubs
  • Payroll records
  • And other information

You can view a list of records IRS may request here.

Answer the Auditor’s Questions

In the case of a correspondence audit, send in the requested documents to correct the error on your tax return or to provide the necessary information to complete it. In the event of a field audit, you will have an interview with an auditor as they visit your business in-person.

In this interview, the auditor will ask questions about your tax return. We suggest being as straightforward and clear as you can. We also advise against volunteering any information or accounting records you are not required to give, including previous years’ tax returns, just to keep the process as simple as possible.

Consider Contacting an Experienced Tax Attorney

The combination of a tight deadline, little to no room for mistakes and potentially severe consequences can be a lot for a taxpayer to handle alone and lead to a poor interaction with IRS. This is why we suggest letting your tax professional do the talking for you.

An experienced tax attorney can help guide you through the process and ensure you are timely, responsive, and compliant. 

Additionally, tax lawyers offer attorney-client privilege, whereas other tax professionals, such as CPAs, do not. Therefore, attorneys are able to speak with your IRS officer on your behalf without risk of subpoena or summons of records discussed. A qualified attorney can review your documents with an expert eye, create the right strategy for you, represent you or your business, and provide valuable advice and guidance. 

Facing an IRS Audit?

If you or someone you know received an audit letter from IRS, reach out to our expert team at Milikowsky Tax Law. We have over a decade of experience working with IRS, tax audits and tax issues. are experts in defending business owners in the face of IRS or other government agency audits.

Is your small business ready for an  audit? We dive into five signs your small business is ready for an IRS audit, here.

Image of a calculator IRS in an audit

IRS audits can be a business owners’ worst nightmare: the hassle, the heaps of paperwork, the potentially hefty bill. However, with the right preparation and resources, an IRS audit doesn’t have to be a stressful event. 

Read on for our ultimate guide to IRS audits. We answer all the most common questions to help you navigate an audit as smoothly as possible. Let’s get started.

What is an IRS Tax Audit?

IRS defines an audit as “as a review and examination of an organization’s or individual’s accounts and financial information to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct.”

How Will You Be Notified of an Audit?

You will know if you are selected for an audit if you receive a verified letter in the mail from IRS. They do not call to notify you about your audit.

Why Was Your Business Selected For an Audit?

There are several different reasons your business may be flagged for IRS audits.

Random Checks

Some businesses are audited in random checks. However, the chances of a random audit are low. Most taxpayers have less than a 1% chance of receiving a random audit check. 

Incorrect Tax Filing Information

IRS runs tax returns through their Discriminant Information Function (DIF) system to track industry benchmarks for each industry and tax bracket. The DIF system also checks for incorrect tax filing information. Any discrepancies in tax forms, or if the form isn’t complete, may trigger an IRS audit.

Other Reasons Businesses May be Audited by IRS

People are more susceptible to an audit if they:

  • Have a home-based business
  • Have a cash business 
  • Have foreign assets 
  • Have large numbers of cash transactions 
  • Claim a disproportionate number of deductions 
  • Are self-employed
  • Issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit

Learn how to avoid IRS red flags from cash transactions, here.

How Long Do You Have to Respond to an IRS Audit?

You have 30 days to reply to the initial audit letter.  

What if You Need More Time to Respond to an IRS Audit?

Your attorney can help by advocating for more time with the IRS agent. We don’t recommend hesitating on responding to an IRS letter on your own, IRS is likely to offer extensions without assistance from an experienced tax attorney who can help present your case.

What Do You Need to Provide in an Audit?

According to IRS, they may ask for copies of:

Receipts

We recommend presenting receipts by date with notes of how they were used by or relate to your business.

Bills

Business owners can include dated bills with information such as the name of the organization that received the payment as well as the type of service it provides.

Canceled checks 

Business owners can organize canceled checks with copies of the bills they paid and any applicable employer reimbursement.

Legal papers 

Include a description of what the case was about, when it happened and how it relates to your business, credit or deduction. Examples include:

  • Divorce settlements including custody agreements
  • Criminal or civil defense papers
  • Property acquisition
  • Tax preparation or advice
  • Loan agreements – Include a copy of the original loan with the following:
    • Names of the borrowers
    • Location of the property
    • Financial institution making the loan
    • Amount borrowed
    • Terms (the number of months to pay)
    • Settlement sheet
    • If the loan was from an institution, include an end of tax year statement indicating interest paid
    • If the loan was not from an institution, provide a statement from the payee indicating the interest paid that year as well as the payee’s address and Social Security number
    • Provide a break-down of how you used the money
  • Logs or diaries
  • Tickets
  • Medical and Dental records
  • Medical savings account statements
  • A copy of a handbook or other statements showing benefit and reimbursement policies
  • Physician statements
  • Capital improvement records for medical purposes including appraisals of the property before and after the improvements
  • Contract for attendant care
  • Theft or loss documents
  • Insurance reports detailing the nature of the loss or damage
  • If not insured, copies of fire department or police reports on the loss, theft or accident
  • Photos or video showing the extent of the damage (if available)
  • Appraisal from a qualified adjustor showing fair market value of the property before and after as well as an estimate of the damage
  • Brief explanation of the loss
  • Employment documents
  • Schedule K-1

You can view a list of records IRS may request here.

How Long Do Audits Take?

The time it takes to conduct an audit depends on the case. It fluctuates depending on:

  • The tax reporting error
  • Communication between the person being audited and IRS officer
  • When and whether the right information is provided to IRS

How Far Back Can IRS Audit Your Return?

IRS audits tax returns from the past three years.  However, audits are typically from the past two years. 

IRS will not look for information older than three years unless they find discrepancies within the audit they are conducting. Most audits do not look for information past six years. In criminal cases, IRS can look back more than nine years.

Facing an IRS Audit?

If you or someone you know received an audit letter from IRS, reach out to our expert team at Milikowsky Tax Law. We have over a decade of experience working with IRS and tax audits and are experts in defending business owners in the face of IRS or other government agency audits.

Read on to learn how to respond to an IRS audit in 2022, here.