When the Internal Revenue Service opens an examination, it will issue an Information Document Request (IDR) that can run several pages long: bank statements, QuickBooks files, travel logs, crypto‐wallet exports, e-mails, even the notes your CPA scribbled during tax-return prep. At first glance it feels like you must hand over the keys to your financial life or risk a “failure to cooperate” penalty. In reality, the picture is far more nuanced. Knowing what the IRS can lawfully compel, what is privileged, and how to negotiate the scope of an IDR often determines whether a high-risk tax audit ends as a routine adjustment or escalates into a clandestine and life-destroying IRS-CI criminal tax investigation, leading to potential incarceration, prosecution, and restitution.
Pro Tip: Any tax advisor (especially your original preparer) that instructs you to ignore a tax audit because there are underlying badges of fraud in the fact pattern is committing the crime of obstruction of justice. This approach is highly likely to take a high-risk audit that is likely to resolve civilly if you hire the right representative and raise the odds of you facing criminal tax prosecution. Often this advice is given when the advisor led you down the golden path of tax evasion in the first place. We have never had a federal or California high risk tax audit client criminally prosecuted in the history of the firm.
Where the IRS Gets its Power – and Where it Stops
Statutory Authority
26 U.S.C. §§ 7601(a) & 7602 allow the Service to “examine any books, papers, records, or other data which may be relevant or material to determining tax liability”. If a taxpayer ignores an IDR, the agent may escalate to an administrative summons. To enforce that summons in federal Court, the government must satisfy the four-part Powell test (proper purpose, relevance, information not already possessed, and procedural regularity). Courts routinely quash summonses that amount to overbroad fishing expeditions. On the other hand, boiler plate language on a summons is to be expected if you choose to stone wall any data request as the IRS does not have enough understanding of your business to know what to request.
Internal Revenue Manual Safeguards
IRM 4.46.4 instructs agents to focus IDRs on issues identified in the opening letter. Beginning-of-exam “background” requests for general ledgers, bank statements, and organizational charts are permitted, but anything outside the year or issue under examination must be justified.
Fourth Amendment Reasonableness
Although tax audits are civil, the Constitution still bars unreasonable searches. Overbroad or duplicative requests can be narrowed through negotiation long before a summons is issued.
Documents You Are Normally Expected to Produce
- Source books and records that substantiate return entries: bank/brokerage statements, sales invoices, payroll summaries, depreciation schedules, mileage logs.
- Third-party confirmations (from merchant processors, crypto exchanges, or escrow accounts) should be obtained if available. If you stall, the IRS will subpoena the data—and you will lose the opportunity to frame the narrative.
- Prior-year returns only if the agent has followed IRM procedures to expand the audit’s scope.
Failing to provide basic records shifts the burden of proof to the taxpayer and opens the door to bank-deposit or net-worth methods—reconstructions that rarely end well.
What You Do Not Automatically Hand Over
- Attorney-Client and Work-Product Privilege: Legal advice, including a Kovel CPA’s analytics, remains private. Provide a privilege log, not the emails.
- § 7525 “Accountant-Client” Privilege: Limited to non-criminal tax advice. It vanishes the instant Criminal Investigation (CI) becomes involved and never covers original return preparation.
- Documents that don’t exist: The Service cannot compel you to create new workpapers (IRM 5.17.6.1.1(3)). If a reconciliation spreadsheet is requested but does not exist, you may simply state that fact.
- Clearly irrelevant years or entities: Push back unless the IRS issues a fresh opening letter or formally expands the audit.
Tactical Responses to an IDR
- Clarify and negotiate: Call the agent immediately and ask how each item relates to a numbered issue. Suggest a phased production approach: Year-1 records are processed first; if they reconcile, Years-2 and -3 can be kept in the drawer.
- Protect originals: Provide Bates-stamped copies, keep duplicates, and log everything you release. If the agent questions a document months later, you will know precisely what was provided.
- Don’t waive privilege by accident: Handing over an e-mail marked “privileged” forever waives that protection. A dual licensed tax attorney-CPA reviews every packet before it leaves our office.
- Respond—truthfully—but strategically: An IDR is not self-enforcing. If a document is privileged or unduly burdensome to locate, you may decline, state the legal basis, and offer an alternative summary. Just do not lie about its existence.
Overproduction hands IRS-CI a roadmap to offshore accounts, misclassified payroll, or crypto gains—and privilege cannot be clawed back. Total noncompliance triggers a summons, court enforcement, potential contempt, risk of enforced summons, raises the likelihood of involvement of the criminal investigation department of the IRS and possible contempt and obstruction sanctions / prosecution. The sweet spot is informed, selective cooperation.
How Privilege Changes Real-World Outcomes
Offshore Accounts Uncovered Mid-Audit
If you are represented only by a CPA:
The agent subpoenas the CPA’s spreadsheets showing undisclosed foreign balances, hands them to IRS-CI, and a willful FBAR-penalty case (or worse) is built around your own records.
If you are represented by an Attorney-CPA who has engaged the CPA under a Kovel agreement:
All work papers are privileged. The team can quietly evaluate exposure and then enter a full blown offshore voluntary disclosure where badges of fraud are apparent or a Streamlined Filing or full Voluntary Disclosure where badges of fraud do not exist that fixes the problem without handing prosecutors a ready-made exhibit.
EDD Payroll Examination Hints at Cash-Pay Fraud
CPA Representation Alone
Bank reconciliations, cash-withdrawal logs, and internal e-mails are turned over in full; the EDD shares them with the Department of Industrial Relations, which piles on wage-and-hour penalties.
Attorney-CPA Representation:
Only the records that the CUIC expressly requires are produced. Any analysis of “independent-contractor” status stays behind the privilege wall while counsel argues an AB 5/Borello defense—often cutting the case off before it spreads to other agencies.
Unreported Crypto Gains
CPA Only
Draft gain calculations and exchange exports go straight into the audit file and become evidence if penalties—or criminal charges—are pursued.
Attorney-CPA
Preliminary computations are done under privilege; the client’s exposure is assessed in confidence, and precise, corrected returns are filed on a timetable that avoids self-incrimination.
In short, the presence—or absence—of legal privilege can determine whether a high-risk tax audit closes quietly or explodes into multi-agency litigation, personal liability and potential tax crime prosecution.
Contact the Tax Law Offices of David W. Klasing if an IRS Auditor Is Demanding Documents—or Is About To
At the Tax Law Offices of David W. Klasing, every audit defense is quarterbacked by a specially trained and experienced dual-licensed Tax Attorney-CPA who speaks both the legal language of privilege and the accounting language of proof. Here is precisely how we tip the scales in your favor:
Front-Load Privilege, Throttle the IDR
We review every Form 4564 line by line, invoke attorney-client, work-product, and Kovel protections where appropriate, and negotiate the scope or timing of document production so that you do not hand the IRS its own roadmap to penalize you. Our Tax Attorney CPAs perform this work daily and are formally recognized by the Service as authorized representatives in audit, Appeals, and Tax Court.
Forensic Reconciliation Before the IRS Finds the Mismatch
Our in-house CPAs tie your bank deposits and e-commerce data to every return the agent will test. If the numbers don’t add up, we fix or explain them before they become an adjustment. Clients tell us this pre-audit scrub is worth the fee by itself.
Integrated Federal-and-State Shield
Because the same file the IRS sees is routinely shared with the CDTFA, EDD, and FTB, we craft a single production strategy that protects you on every front—sales tax, payroll, income-tax nexus, and even FBAR/crypto exposure—so one audit does not become a four-agency problem.
Appeals-Ready from Day 1
If the agent insists on an adjustment, our dual-licensed tax litigation attorneys & CPAs preserve the record, draft position memos keyed to the IRM and controlling caselaw, and, when necessary, walk the matter straight to IRS Appeals or U.S. Tax Court—venues where CPAs ordinarily cannot practice. Few firms can seamlessly pivot from field audit to tax litigation without bringing in new counsel; we do it in-house.
Privilege that Survives
Should your matter drift toward criminal tax territory, the same privilege envelope we created on Day 1 still covers you; a non-lawyer representative cannot promise (or deliver) that.
Audit deadlines do not pause, and unanswered IDRs quickly become summonses. Call us today at (800) 681-1295 or schedule a confidential, reduced-rate initial consultation online HERE. We will analyze the document request, assert every lawful shield, and deliver a production plan that protects your net worth—and your peace of mind—before the IRS (or any California state agency) sees a single page.
