How Returns Are Selected and What an “Audit” is (and isn’t)
An IRS tax audit is a civil examination of a filed tax return to determine the correct tax liability. Returns are selected in several ways. The IRS utilizes computer scoring systems, most notably the Discriminant Function (DIF), to rank returns based on the probability of misstatement; high-scoring returns are more likely to be assigned to examiners. The IRS also performs information matching and may open an exam when third-party reports (Forms W-2, 1099, 1098, etc.) don’t align with a filed return. Separately, taxpayers can receive a CP2000 underreporter notice from the Automated Underreporter (AUR) function when the IRS’s information returns don’t match their filing; a CP2000 proposes changes but is not, itself, a formal audit—though it can lead to one if unresolved. In addition to risk scoring and mismatch programs, the IRS runs the National Research Program (NRP), which randomly selects returns to measure compliance and refine the IRS’s models. Related-party exams, prior-year issues, whistleblower referrals, and other leads can also influence the selection process.
How an Audit Begins and Unfolds (Correspondence, Office, and Field)
Most audits start with a letter. For correspondence exams, the IRS typically uses the Letter 566 series, which identifies the items under review and requests documents by mail or through a secure portal. Office and field examinations begin with an initial contact letter, commonly Letter 2205, which advises that your return has been selected and requests that you (or your representative) schedule an appointment. In all cases, the IRS will enclose or direct you to Publication 1 (Your Rights as a Taxpayer), which describes audit, appeal, and collection processes. During the exam, the agent issues Information Document Requests (IDRs) (Form 4564) listing specific records and due dates; Large Business & International (LB&I) agents propose adjustments on Form 5701 (Notice of Proposed Adjustment) with detailed explanations on Form 886-A (Explanation of Items). Examiners are instructed to initially contact taxpayers by mail, tailor requests to the specific return under examination, and document the file with letters and workpapers that support any proposed changes.
You have essential process rights during an examination. You may retain representation (attorney, CPA, or EA) using Form 2848 (Power of Attorney); if you ask to consult with your representative, the IRS must generally suspend the interview. For in-person interviews, taxpayers may audio-record the meeting at their own expense by providing the IRS with advance written notice (the Internal Revenue Manual recommends a 10-calendar-day notice period); the IRS can also record with advance notice. The IRS may contact third parties (e.g., banks, vendors) but must provide advance notice of that intent and keep a list of contacts available to you upon request—subject to limited exceptions.
Scope, Techniques, Statutes, and Outcomes
Tax audits proceed by analyzing issues and testing records. Agents use IDRs, interviews, third-party confirmations, indirect methods where appropriate, and can expand the scope to other years or related returns if required filing checks or facts warrant it. If voluntary cooperation falters, the IRS can issue an administrative summons for records or testimony under the Internal Revenue Code. Throughout, the examiner must support proposed changes with facts and law and document them in the workpapers and report.
Three timing rules matter. First, the assessment statute of limitations generally runs three years from the later of the due date or the date the return is filed; it extends to six years for substantial omissions of gross income and is unlimited in cases of false or fraudulent returns or no return. Second, if you and the IRS disagree at the exam level, you ordinarily receive a “30-day letter” offering a conference with the IRS Independent Office of Appeals. Third, if the case remains unagreed, the IRS issues a Statutory Notice of Deficiency (often Letter 3219/CP3219), giving you 90 days (150 days if addressed to you outside the U.S.) to petition the U.S. Tax Court; assessment is restricted during that window.
If you agree, you’ll typically sign Form 4549 (Income Tax Examination Changes) or a waiver such as Form 870, and the IRS will assess the agreed deficiency. If you disagree, you can send a formal protest to Appeals within the time on your 30-day letter or file a Tax Court petition within the 90/150-day deficiency period. Appeals is an independent function that seeks to resolve disputes without litigation. (LB&I) cases may include interim tools like Fast Track Settlement.
Penalties and Interest
The IRS may propose civil penalties, including the accuracy-related penalty (generally 20% of the underpayment) and, in egregious cases, the civil fraud penalty (75% of the underpayment attributable to fraud). Separate additions may apply for failure to file and failure to pay. Statutory interest accrues on underpayments and is set in reference to the short-term federal rate, which can change quarterly. Note: if the IRS has the evidence to assess a 75% fraud penalty, they have the evidence to criminally prosecute for tax crimes.
High-Risk “Eggshell” or “Reverse Eggshell” Audits (and Why Representation Matters)
Most IRS exams are purely civil. But when a civil audit involves facts that could imply criminal tax issues (for example, willful underreporting or falsified records), practitioners refer to it as an “eggshell” audit because every factual step must be taken with great care; a “reverse eggshell” audit describes the situation where the examiner already suspects criminal conduct that the taxpayer hasn’t realized is in play. These are practitioner terms, not formal IRS programs, but the risk is real: civil exams can be referred to IRS Criminal Investigation when “firm indications of fraud” arise. Because communications with a non-lawyer preparer are generally not privileged in criminal tax contexts and can be compelled by summons, high-risk exams should be handled under the attorney-client privilege and work-product protections—often with accountants engaged through a Kovel arrangement so that necessary forensic accounting occurs within the privilege umbrella. If an interview is requested in a sensitive matter, remember: you can insist that your authorized representative handle IRS interactions; absent a summons, the IRS may not require you to attend personally.
Contact the Tax Law Offices of David W. Klasing if You Are Facing an IRS Tax Audit
Do not default back to your original preparer to “explain” the numbers. In a high-risk civil exam or where there’s any possibility of a criminal tax investigation, communications with a non-lawyer preparer are not privileged and can become evidence. By engaging our dual-licensed Civil and Criminal Tax Defense Attorneys & CPAs at the Tax Law Offices of David W. Klasing, you place strategy within the attorney-client and work-product privileges. Where specialized accounting is needed, our law firm employed CPAs ensure that analysis and workpapers are conducted within the privilege umbrella.
At the Tax Law Offices of David W. Klasing, we manage the exam from the first contact: we take over communications under Form 2848, plan the scope, and pace the document flow through targeted IDRs, verifying that each request is relevant and properly framed. We prepare your file to IRS standards (bank/POS tie-outs, reconciliations, and narrative context) and use the Internal Revenue Manual and governing statutes to defend your position, challenge unsupported assumptions, and, where appropriate, channel disputes to the Independent Office of Appeals or U.S. Tax Court within the 30-day and 90/150-day windows. If a matter exhibits high-risk “eggshell” characteristics, we adopt damage-control protocols designed to minimize the risk of referral to the clandestine IRS Criminal Investigation Division.
If the IRS has contacted you about a correspondence, office, or field examination, or if you’ve received a CP2000, a 30-day letter, or a Notice of Deficiency, it would be wise to contact the experienced dual-licensed tax attorneys and CPAs at the Tax Law Offices of David W. Klasing today. Our team knows how IRS examiners build cases, how LB&I issues NOPAs, and how Appeals analyzes hazards of litigation. Begin with a confidential, reduced-rate initial consultation with the Tax Law Offices of David W. Klasing. Call (800) 681-1295 or contact us online HERE.
