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What You Can Expect From an IRS Examination and How to Prepare for It Properly

February 18, 2016
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By Eric Albert, JD, CPA and Edwin Biazon, EA

There it is. You are sorting through the mail and you see the letter from the Internal Revenue Service (IRS) indicating that the IRS will be conducting an examination of your organization’s tax return. Before you hit the panic button, remind yourself that if you consider the information in this article, the examination process will hopefully be concluded with a successful result, and with less stress.

To begin, the IRS conducts two types of audits:

Field audit (or examination) – The initial contact letter will indicate that the IRS agent wishes to conduct the examination at your organization’s premises.

Office/correspondence audit (or examination) – The letter will request that you mail documents to an IRS office.

If a field audit is to be conducted, an agent will typically visit your location, tour the premises, and conduct an in-person interview with an officer or representative of the organization. The agent will review all requested documents, including your organization’s books and records, annual tax returns and related returns such as employment tax returns, or prior and subsequent year returns.

If an office/correspondence audit is being conducted, you can expect that the information that you submitted by mail will be reviewed by the assigned IRS agent. The agent may call you to request clarification on a particular item or send an additional information request as a normal course of the examination. A correspondence audit may become a field audit depending on the type of issues generated during the course of the examination.

As part of the examination you may be asked to produce a large volume of financial information and other correspondence. The IRS will often enclose an Information Document Request with the examination letter. As you review the request, you may realize that the IRS agent is requesting a substantial amount of information. We have found that calling the agent prior to the appointment date and asking the agent if there is a specific area that will be focused on can provide you with guidance as to what areas are more important to your particular agent. Thus, you may be able to shorten the list of information that you will need to present to the examining agent. 

Despite the horror stories that we have all heard, most of the IRS agents that we deal with are professional and their agenda is nothing more than to do their job. We recommend that you cooperate with any reasonable request for documents. If you believe certain items being requested are unreasonable, then we recommend contacting the agent to make sure that you understand the agent’s request. At times the language used in the tax code has a different meaning than it does in your world. Also, any communication, oral or written, should be as accurate as possible. The better the rapport and credibility that you can establish, the greater the likelihood that the examination will go as smooth as possible.

After the examining agent has gathered information, the audit proceeds to its final stages. The organization, its representative, and the IRS agent or other IRS personnel will discuss audit findings in a closing conference (in person or by telephone). The following may occur at the closing of the audit:

  • Accept returns as filed (no change)
  • Accept returns and recommend changes to improve compliance (no change with advisory) – conference topics (discuss agent findings and recommendations)
  • Adjust tax-exempt status or tax liability – conference topics (deliver report of examination and explain changes)
  • Allow or disallow a claim for refund or a request for abatement – conference topics (deliver report of examination and explain disallowances)
A final closing letter will be issued after the closing conference and all administrative and review processes have been completed.

If the organization is not in agreement with the agent’s determinations, the organization can certainly avail itself of its right to appeal. The first level of appeal is within the IRS. The decisions reached by the IRS agent may be appealed to a local appeals office, which is the only level of appeal within the IRS. Conferences with appeals office personnel may be done in person, through correspondence, or by telephone with the taxpayer or its authorized representative. Only attorneys, CPAs, or enrolled agents are allowed to represent a taxpayer in an Appeals Conference.  An unenrolled preparer may be a witness at the conference, but not a representative.

In addition to administrative remedies, an organization may use certain judicial remedies. If statutory prerequisites are met, an organization may file suit in a United States District Court or the United States Claims Court, or in the United States Tax Court for a redetermination of any tax deficiencies. An organization may also file suit for a declaratory judgment in certain situations.

To conclude, if you filed an accurate return and maintain the proper documentation, the IRS examination process can be completed successfully.

For more information on IRS examinations and how to properly prepare, please contact Not-For-Profit Practice Leader Adam Reiss.