Companies/Businesses are not picked at random. The IRS relies on layered analytics, third-party data matching, targeted issue campaigns, informant leads, and coordinated federal–state programs to focus a relatively small number of business returns for examination. Understanding these pipelines—and where your company’s facts intersect with them—is the key to preventing a routine inquiry from becoming a high-risk eggshell tax audit or, worse, a criminal tax investigation.
At the Tax Law Offices of David W. Klasing, we represent business filers—public and private corporations, partnerships (including tiered funds), S-corps, and multi-state enterprise groups—through every stage of federal and California state examination. Whether your company is flagged by LB&I analytics or campaign selection, the Large Partnership Compliance program, AUR/DIF scoring, or a California state tax referral from the FTB or CDTFA, our dual-licensed civil and criminal tax defense attorneys & CPAs are structured to keep the matter civil, contain adjustments, and prevent an eggshell audit from sliding toward a life-altering IRS-CI referral.
Tax audits of companies rarely stay in one lane. Federal corporate or partnership adjustments routinely flow to California (and other states), and state audit results can cycle back to the IRS. We build an integrated defense: preserving attorney–client and work-product privilege, engaging accountants under Kovel where necessary, stabilizing books and records, and coordinating parallel federal–state resolutions. Where exposure exists—e.g., employment-tax pyramiding, ERC claims, micro-captive or conservation-easement issues, transfer pricing / foreign tax credits, sales & use tax gaps—we pursue proactive compliance solutions, including qualified voluntary disclosures and negotiated closing agreements, to minimize civil assessments and avert criminal risk for the entity and potentially liable officers / owners under “responsible person” regimes.
If your company has been selected—or you see the telltale signs that selection is imminent—consult us before anyone speaks to the government. We will conduct a comprehensive risk assessment, map the federal–state spillovers, and implement a strategy focused on damage control, finality, and business continuity. Call 800-681-1295 or contact us online to schedule a reduced-rate initial consultation HERE.
The Core Selection Engines: DIF, UIDIF, and Manual Classification
Every filed tax return receives a computer score. The IRS’s Discriminant Function (DIF) score predicts the likelihood that an adjustment will be proposed if the return is examined, based on patterns learned from prior audits. A related Unreported Income DIF (UIDIF) model estimates the potential for hidden income. High-scoring returns go to human classifiers, who review the file and decide whether to open an exam and which issues to pursue.
For individuals and many closely held businesses, third-party information matching operates in conjunction with DIF. The Automated Underreporter (AUR) program compares what you reported with Forms W-2, 1099, 1098, and other information returns. Significant mismatches trigger CP2000 notices (not formal audits), but unresolved discrepancies can be routed to Examination.
LB&I campaigns and Large Partnership Compliance (LPC)
For corporations and partnerships with assets generally exceeding $10 million, the IRS Large Business & International (LB&I) Division uses an “issue campaign” model. Campaign pages publicly describe focus areas—e.g., subpart F manufacturing branch rules, foreign tax credits, Section 965 transition tax, micro-captive insurance, and others—and state that returns exhibiting the targeted fact patterns will be selected for issue-based examinations or other treatments.
LB&I also runs the Large Partnership Compliance (LPC) program, which uses data analytics—and now artificial intelligence—to identify high-risk partnerships for audit. In 2023, the IRS announced AI-assisted audits beginning with 75 of the largest partnerships, and it has continued to expand that effort. Expect heightened scrutiny where balance-sheet discrepancies, complex allocations, digital asset activity, or opaque related-party transactions are present.
Other Selection Pipelines and Spillovers Affecting Companies
NRP Research Audits
A small, statistically valid sample of returns is examined under the National Research Program (NRP) to measure compliance and recalibrate DIF/UIDIF models. Selection is research-driven (not risk-based), but the exams are intensive, and their results influence future scoring across the filing population.
Compliance Assurance Process (CAP)
Very large filers may seek CAP, a real-time, cooperative review to resolve material issues before filing. CAP is voluntary and limited to taxpayers who meet the eligibility and suitability criteria; acceptance reduces the likelihood of post-filing exams on covered issues but requires robust transparency, timely disclosures, and sustained governance.
Whistleblower Leads
The IRS Whistleblower Office can trigger examinations where insiders or competitors submit credible information on Form 211. For IRC §7623(b) cases, awards generally range from 15% to 30% of the collected proceeds and apply when the amount in dispute exceeds $2 million (and, for individuals, the applicable income thresholds). These incentives make lead-driven exams common in employment-tax and abusive-transaction matters.
Federal–California State Sata Sharing
Under Internal Revenue Code § 6103(d), the IRS is authorized to share federal return and audit information with state tax authorities for tax administration purposes. Through the Governmental Liaison Data Exchange Program (GLDEP), the IRS routinely transmits audit adjustments and other taxpayer data to the Franchise Tax Board (FTB) and California Department of Tax and Fee Administration (CDTFA).
Issue Patterns that Commonly Put Companies on the Radar
- Employment tax “pyramiding,” cash payroll, or chronic Form 941 delinquencies: The IRS-CI and DOJ prioritize willful failures to withhold and remit, employee leasing abuses, and cash pay schemes. Expect aggressive civil and criminal remedies, including injunctions, trust-fund recovery penalties, and prosecutions.
- Employee Retention Credit (ERC): Following a processing moratorium announced September 14, 2023, the IRS continues a broad crackdown, disallowing large volumes of claims and opening audits and criminal tax investigations where promoters pushed ineligible filings. Congress and the IRS have highlighted pervasive risk and are advancing resolution programs.
- Micro-captive insurance and syndicated conservation easements: These remain high-priority areas of abusive-transactions. The IRS has moved from Notice 2016-66 to formal regulations listing certain micro-captive arrangements; conservation-easement enforcement continues through audits, settlements, and litigation.
- Cross-border and international tax: LB&I campaigns target subpart F/GILTI computations, foreign tax credits, transfer pricing, and withholding regimes. U.S. shareholders of CFCs who underreport subpart F income are explicitly identified for selection.
- Partnership complexity and pass-through discrepancies: Under the BBA centralized partnership audit regime, the IRS can assess tax at the partnership level unless a valid “push-out” is made. Returns with schedule M-2 balance mismatches, opaque allocation methodologies, or missing required statements draw attention.
- Cash-intensive or high-risk industries: Restaurants, dispensaries, construction, gambling, and other cash-heavy businesses are frequent targets where bank deposit, net worth, or expenditure methods can reveal underreporting. IRS Audit Technique Guides and CI emphasis areas reflect this focus.
- Digital assets: IRS announcements emphasize hiring crypto specialists and deploying analytics to track blockchain activity; mismatches between Forms 1099-DA/1099-K and returns are increasingly used to drive inquiries.
If an examining revenue agent or officer sees “firm indications of fraud,” they consult a Fraud Referral Specialist or directly refer the case to IRS-CI. At that point, the objective shifts from determining the correct tax to gathering evidence for prosecution. The IRS-CI refers to the fact that in FY2024, it initiated 2,667 investigations, obtained 1,571 convictions, and achieved a 90% conviction rate—statistics that underscore why early containment is critical.
Artificial intelligence is Already Influencing Selection
Beginning in 2023, the IRS publicly confirmed that it is deploying AI and advanced analytics to improve case selection, particularly for complex partnerships and high-wealth taxpayers, with governance over AI use cases continuing to mature under TIGTA oversight. Practically, that means pattern anomalies that once slipped through manual screens are more likely to be surfaced and examined. According to the IRS’s current Strategic Operating Plan, expanded AI-assisted enforcement is on the horizon for large partnerships, large corporations, and their related employment tax returns.
What To Do if Your Company is Selected
Do Not Let Your Original Preparer Run the Audit
Communications with non-attorney preparers are generally not privileged, and preparers can be compelled (and incentivized) to testify if their work is questioned. A dual-licensed Tax Attorney-CPA can extend work-product and attorney-client protections, and, via a Kovel agreement, involve accountants without sacrificing confidentiality.
Assume Eggshell Risk Until Ruled Out
Treat even a “routine” inquiry as potentially high-risk until experienced counsel completes a privileged risk assessment. Avoid client interviews with the IRS whenever possible; if unavoidable, consider asserting your Fifth Amendment rights against answering potentially incriminating questions only with the assistance of qualified criminal tax defense counsel.
Stabilize the Record
Issue a litigation hold, gather the underlying books and records, reconcile them with filed returns, and correct objective mismatches (for example, discrepancies in third-party information) before positions harden. The goal is to prevent a fraudulent referral through damage control.
Mind the Spillovers
Model state and federal consequences together; federal adjustments will often flow to the states, and state findings can circle back to the IRS. Plan resolutions that address both.
Contact the Tax Law Offices of David W. Klasing if Your Company Has Been Selected for Audit
If your company has been selected for examination by the IRS through DIF/UIDIF analytics or an LB&I/Large Partnership Compliance selection, or by a California state agency with a federal spillover, the mission is likely immediate damage control. We move first to maintain a strictly civil engagement, preserve attorney–client and work-product protections, and bring accountants in under Kovel so that sensitive fact-gathering remains privileged. Our dual-licensed criminal tax defense attorneys & CPAs at the tax law offices of David W. Klasing stabilize the record, reconcile books to filed returns, and manage all government contacts while we assess eggshell or reverse-eggshell risk and craft an issue-by-issue strategy aimed at containment, credible advocacy, and finality.
At the tax law offices of David W. Klasing, we represent public and private corporations, tiered partnerships and funds, and multi-state enterprise groups in high-exposure areas including ERC, employment tax and potential trust-fund personal liability, transfer pricing and international regimes (subpart F/GILTI/withholding), micro-captives and other listed transactions, digital-asset reporting, and CAP eligibility or suitability concerns. Where historical exposure exists, we evaluate and, when advantageous, implement proactive compliance or voluntary disclosure to cap civil assessments and avert criminal exposure for the entity and responsible officers. Do not let your original preparer run the audit—preparer communications are generally not privileged and can become evidence. Call 800-681-1295 or contact us online to schedule a reduced-rate initial consultation HERE. We will conduct a privileged risk assessment, map federal–state consequences, and execute a plan focused on business continuity and avoiding a CI referral.
