First 48 Hours: Verify, Triage, and Put Representation in Place
Most IRS tax audits begin with a letter, not a phone call. The notice will inform you whether it’s a correspondence exam (by mail) or an in-person office/field examination, and it will specify which years and issues are under review. The IRS’s own guidance confirms that audits are conducted by mail, at an IRS office, or at your place of business, and initial contact is by mail.
Start by (a) confirming the notice is genuine, (b) calendaring every deadline on the letter, and (c) deciding who will speak for the business. If you retain representation, file Form 2848 (Power of Attorney) so your authorized representative (not you) interfaces with the agent.
Understand how your return may have been selected. The IRS uses computer scoring (e.g., DIF), third-party information matching, and compliance projects; it also runs the National Research Program to measure compliance randomly. Separately, a CP2000 “under-reporter” notice proposes changes based on mismatched Forms W-2/1099; it is not by itself a formal audit, though it can lead to one if unresolved.
If this is an in-person exam, expect an initial contact/appointment letter from the 2205 series (e.g., 2205-A for individuals, 2205-L for LB&I business exams; 2205-D for partnerships). For correspondence examinations, the IRS commonly uses the Letter 566 series to identify items under review.
Build (or Rebuild) Your File the Way Examiners Test It
Examiners will issue Information Document Requests (IDRs) and expect documentary support. Organize by issue and year; never send originals. Publication 583 explains what records small businesses should keep (sales, purchases, payroll, assets) and for how long. Publication 334 is the small-business guide to income, expenses, and accounting methods.
Know where strict substantiation applies. Travel, meals, and specific “listed property” demand contemporaneous logs and receipts under IRC §274(d) and the related regulations; Publication 463 details what, when, and how to document (e.g., mileage logs for vehicle expenses). If these records are missing, the IRS generally will not accept estimates.
If your return has third-party data mismatches (common in CP2000 cases), gather all Forms W-2/1099/1098 and reconcile differences before you respond. The IRS explains CP2000 notices are proposals based on AUR matching, not bills—your records can rebut them in whole or part.
For payroll-tax issues, pull your Forms 941, EFTPS proof of deposits, and trust-fund tracking. The Trust Fund Recovery Penalty under §6672 can impose personal liability on “responsible persons” who willfully fail to collect or pay over withheld taxes. This issue frequently surfaces in small-business exams when cash flow is tight.
Manage Scope, Statutes, Procedures, and Potential Outcomes
Exams proceed through IDRs, interviews, and, if cooperation lags, administrative summonses for records or testimony. Throughout, the agent must support proposed adjustments with facts and law and document the file. Publication 556 outlines the examination process (correspondence, office, field), how issues are developed, and what happens next.
Mind the timing rules. The general assessment statute is three years from the later of due date or filing; it extends to six years for substantial omissions of income and is unlimited in cases of fraud or no return. If you and the examiner disagree, you’ll usually receive a “30-day letter” offering an administrative appeal; if still unagreed, a Statutory Notice of Deficiency triggers a 90-day window (150 days if addressed to you outside the U.S.) to petition the U.S. Tax Court without prepayment. These routes are summarized in Publication 556 and the IRS’s Taxpayer Bill of Rights.
Penalties and interest matter. Common civil tax penalties include the 20% accuracy-related penalty under §6662 and, in egregious cases, the 75% civil tax fraud penalty under §6663; interest accrues by statute. (Reasonable-cause defenses may apply, and for penalties, the IRS bears the burden of production under §7491(c)).
Special small-business flash points:
- Worker classification: If the IRS challenges 1099 usage, you may be able to request an SS-8 determination or assert Section 530 relief (a statutory safe harbor that can terminate employment-tax liability if reporting/substantive consistency and “reasonable basis” are met).
- Trust fund payroll taxes: Examiners can pursue responsible individuals under §6672 for withheld income/FICA not deposited. Know that the TFRP equals the trust-fund amount and is separate from the employer’s share. IRS
If your business operates in California state and the audit letter is from the CDTFA (sales & use tax), the process and defenses differ. The CDTFA can employ markup tests and, in suitable cases, may offer the Managed Audit Program (MAP)—a voluntary, limited-scope self-audit with statutory half-interest on verified underpayments upon timely completion. Click on the link to learn more.
High-Risk “Eggshell” and “Reverse Eggshell” Exams
Most tax audits remain civil. But if facts suggest willful underreporting, double sets of books, skimming, or falsified documents, civil personnel are instructed to stop their normal work and consult Fraud Enforcement (and may refer the matter to IRS Criminal Investigation when firm indications of fraud exist). This is written into the Internal Revenue Manual (IRM).
Two rules follow from that: (1) do not speak directly to the IRS about sensitive issues without counsel (your statements are party admissions), and (2) do not default to your original preparer to “explain” numbers in a high-risk setting. Communications with non-lawyer preparers are generally not privileged in criminal tax contexts; the limited §7525 practitioner privilege does not apply in criminal tax matters, and preparers can be summoned as witnesses. Keep strategy within the attorney-client and work-product protections; where accounting horsepower is needed, experienced counsel can engage CPAs under a Kovel arrangement so necessary forensic work occurs under privilege while still supplying the government with the facts it is legally entitled to obtain.
What 4 Badges of Fraud Are Most Likely to Turn a Civil IRS Audit Criminal?
https://youtube.com/shorts/oFpKXaOGcrU?si=nn7R8rwru13laXqo
How Small Businesses Should Respond—Step by Step
- Centralize communications under a signed Form 2848 (attorney/CPA/EA). Track every IDR and due date; where needed, request reasonable extensions before deadlines.
- Produce complete, organized responses that are tailored to the items under exam (per the notice/IDRs). Publication 583/334 and Publication 463 provide the blueprint for acceptable business and travel/vehicle records.
- Protect the statute and appeal windows. If you receive a 30-day letter, evaluate Appeals; if a Notice of Deficiency arrives, calendar the 90/150-day deadline and consider a timely Tax Court petition to preserve prepayment review.
- Address penalties strategically. Evaluate accuracy-related vs. fraud exposure, supervisory-approval requirements, and reasonable-cause defenses early.
- For payroll and classification issues, assess §6672 TFRP exposure and whether SS-8 or Section 530 relief is viable.
- If the letter is from CDTFA, consider whether MAP eligibility (and its half-interest rule) or other relief pathways apply; do not let sales-tax audits drift—interest compounds.
Don’t Hire Your Original Preparer if You Get Audited by the IRS, Especially if You Have Cheated
https://youtu.be/BI-xtBILL5I?si=5z5AAXdLJyxvc0cQ
Contact the Tax Law Offices of David W. Klasing if Your Small Business is Being Audited
When an exam notice hits, the outcome turns on process control, evidentiary rigor, and protecting you from unforced errors. At the Tax Law Offices of David W. Klasing, our dual-licensed Civil and Criminal Tax Defense Attorneys & CPAs take over communications under Form 2848, map the issues against the actual audit program you’re in (correspondence, office, field, or CDTFA), and build the record the IRS (or CDTFA) expects—bank/POS tie-outs, payroll and trust-fund proofs, reconciliations, and substantiation that comports with Publications 583/334/463 and controlling statutes. We also calibrate penalty defenses, from §6662 accuracy-related exposure to potential §6672 (TFRP) risks, and preserve your 30-day Appeals route or 90/150-day Tax Court rights when appropriate.
If badges of fraud or “eggshell” dynamics appear, our dual-licensed Civil and Criminal Tax Defense Attorneys & CPAs implement damage-control protocols aligned with the Internal Revenue Manual’s fraud-referral framework—keeping strategy within the attorney-client and work-product umbrellas and, where needed, engaging forensic CPAs under Kovel so we can deliver the facts the government is entitled to without sacrificing privilege. Our goal is simple: resolve your audit at the lowest defensible number while minimizing life-altering criminal tax risk.
Don’t let deadlines or avoidable missteps decide your case. If you’ve received a Letter 566 or 2205, an IDR, a CP2000, a 30-day letter, or a Notice of Deficiency, or if CDTFA has opened a sales and use tax audit, start with a confidential, reduced-rate initial consultation with the Tax Law Offices of David W. Klasing. Call us today (800) 681-1295 or reach us through our online contact form HERE.
In the history of our firm, we have never had an IRS tax audit client prosecuted for tax crimes.
