If you have just opened an envelope from the IRS or refreshed your IRS Online Account and seen a letter you weren’t expecting, take a breath. Receiving an audit notice is unsettling. It does not have to be a disaster.
I represent both U.S. and foreign clients in IRS examinations, and I can tell you that audits are, more than anything else, a process. The taxpayers who get the best outcomes treat it that way, methodical, deadline-driven, evidence-based, rather than as a crisis. This guide walks you through how to do that, from the day the notice arrives through Appeals, Tax Court, and post-assessment options. If you have cross-border facts such as foreign accounts, foreign entities, foreign trusts, foreign gifts, or treaty positions, read the international section below even if the audit notice does not appear to raise those issues. The information-return penalties can dwarf the underlying tax.
Understand What An Audit Actually Is
An audit is a review of a tax return and supporting records to confirm that what was reported is accurate. The IRS accepts most returns as filed. The ones it examines are usually flagged for a third-party mismatch (W-2, 1099, K-1, brokerage), an algorithmic score, a related-party examination, or random selection.
The most important point I make to clients in the first conversation is this: an audit is a verification process, not an accusation. Holding that distinction in mind changes how you behave during the audit, and how you behave changes the outcome.
It is also worth noting that our tax system depends on honest reporting. In consultations, prospective clients often ask, “But how would they know about…” followed by whatever amount or issue concerns them.
Identify The Type Of Audit
Correspondence Audit – Handled by mail or through the IRS Document Upload Tool. Usually, one or two specific items, such as a credit, deduction, or a 1099 mismatch.
Office Audit – You appear at an IRS office with documentation. Typically broader than a correspondence audit but narrower than a field audit.
Field Audit – A Revenue Agent visits your home, business, or your representative’s office. The most comprehensive type, common for business taxpayers, high-income individuals, and complex international cases.
If you have a choice about where the meeting takes place, hold it at your representative’s office. You control the documents produced and avoid letting the examiner form impressions based on what is sitting on a desk.
Step 1: Read The Notice Carefully Before You Do Anything Else
The audit letter is the operative document. Before you call, email, or send anything, identify five things:
- The tax year (or years) under examination.
- The specific items the IRS is questioning.
- The response deadline.
- The form of response the IRS expects (mail, fax, upload, in-person).
- Whether the IRS is requesting documents or proposing a change.
A document request calls for substantiation. A proposed change calls for a decision; you either agree, partially agree, or appeal. Resist the impulse to call the IRS the moment the notice arrives. An unprepared call expands issues, creates confusion, and produces statements you may later need to correct.
Step 2: Do Not Ignore Notice
Ignoring an IRS notice is the single most damaging response I see. The audit does not go away. The IRS proceeds without your input, disallows deductions and credits it cannot independently verify, and assesses tax, penalties, and interest. Even if you cannot fully respond by the deadline, contact the IRS or have your representative do so. Most deadlines can be extended for a reasonable period if you ask before they expire. Almost none can be extended after they expire.
Step 3: Decide Whether You Need Representation
You have the right to represent yourself, but for many audits, representation is the difference between a clean resolution and a multi-year proceeding. I generally recommend representation when the audit involves business income, Schedule C, rental real estate, or cryptocurrency; foreign accounts, foreign assets, or foreign entities; an in-person interview; multiple tax years; proposed penalties; incomplete records; or any potential exposure beyond civil tax.
A qualified representative communicates with the examiner on your behalf, preserves legal privileges where they apply, organizes the evidence so the examiner can verify your position quickly, and keeps the audit focused on the items in the notice instead of letting it spread.
A Note For Non-U.S. Taxpayers: The U.S. tax system is procedurally different from most foreign systems, and the consequences of routine missteps like admissions in an interview, late information returns, and signing the wrong form can be severe. If you have U.S. tax exposure, do not attempt an IRS audit without U.S. tax controversy counsel.
Step 4: Gather And Organize Your Documentation
Documentation is the foundation of an audit defense. The burden of proof is on you to substantiate deductions, credits, and most return positions. The IRS does not have to prove you are wrong; you have to prove you are right.
Beyond the return itself, assemble the third-party reporting forms (W-2, 1099, K-1, 1095, 1098); bank and credit card statements; receipts, invoices, contracts, and closing statements; mileage logs and calendars; loan and payroll records; accounting ledgers; and prior-year and later-year returns that explain carryovers, basis, or depreciation.
Organize by issue, not just chronologically. For each item the IRS has questioned, build a short proof schedule that ties documents to the tax return. The goal is to make it easy for the examiner to verify your position. One practical rule: never send originals. Send photocopies and keep complete copies of everything you submit, along with mailing or upload confirmation.
Step 5: Know Your Rights
The Taxpayer Bill of Rights and the Internal Revenue Manual give you specific protection. The IRS lists quality service, representation, the right to challenge the IRS and be heard, the right to appeal, the right to pay only the correct amount, and the right to privacy and confidentiality. These are not theoretical. If an examiner is not considering the documents you provided, you can ask for a manager conference. If an examiner is applying the wrong legal standard, you can challenge it. If negotiations are deadlocked, you can move the matter to Appeals.
Step 6: Respond And Answer Only What Is Asked
The cardinal rule of audit defense is to answer the question that was asked and nothing more. If the IRS asks for substantiation of your charitable contributions, send that, not unsorted bank statements full of unrelated transactions. Cooperation is not the same as expansiveness.
A focused written response usually includes a copy of the IRS notice; taxpayer name, identification number, and tax year; a short statement that you are responding to the notice; a list of the issues addressed; organized photocopies of supporting documents; a summary schedule tying documents to the return; a clear statement of the outcome you are requesting; and representative authorization (Form 2848 or 8821) where applicable.
Step 7: Prepare Carefully For Any Interview
If the audit involves an in-person meeting, prepare. Review the return line by line. Review the documents you have produced. Anticipate what the examiner will ask. A few rules I give clients before any IRS interview: do not guess (if you do not remember, say you need to check); answer only the question asked; do not volunteer unrelated information, even if it feels harmless; defer to your representative on what is produced and what is said; and do not allow a tour of a business without a plan for what is shown and why.
Step 8: Pay Special Attention To International Compliance
This deserves its own section because international compliance is where I see the most damage done in audits.
The U.S. international tax system runs on information returns. These are forms that disclose foreign accounts, assets, entities, trusts, and gifts. They are separate from your income tax return, separate from each other, and each carries its own penalty regime. Penalties apply even where no additional income tax is due.
If you have foreign accounts, foreign financial assets, ownership of or signature authority over a foreign entity, an officer or director role in a foreign corporation, CFC or PFIC exposure, an interest in a foreign partnership, a foreign disregarded entity or branch, a relationship with a foreign trust, a large gift or bequest from a non-U.S. person, or any treaty or cross-border withholding position — treat the audit as an international case until proven otherwise.
The main international information returns and their penalty exposure:
| Form | Trigger | Initial Penalty Exposure |
|---|---|---|
| FBAR (FinCEN Form 114) | U.S. person with foreign financial accounts exceeding $10,000 in aggregate at any time during the year | Up to $10,000 per non-willful violation; willful violations up to the greater of $100,000 or 50% of account balance; criminal penalties available |
| Form 8938 | Specified foreign financial assets above filing thresholds (IRC §6038D) | $10,000, plus $10,000 per 30-day continuation after IRS notice, capped at $50,000 |
| Form 5471 | Certain U.S. officers, directors, or shareholders of certain foreign corporations | $10,000 per annual accounting period, plus $10,000 per 30-day continuation, capped at $50,000; foreign tax credit reductions also apply |
| Form 8865 | Controlled foreign partnerships, transfers, and certain interest changes | $10,000 for certain failures, plus continuation penalties; foreign tax credit reduction may apply |
| Form 8858 | U.S. persons operating a foreign branch or owning a foreign disregarded entity | Generally follows IRC §6038 regime |
| Form 3520 / 3520-A | Foreign trust creation, transfers, ownership, distributions; large foreign gifts | Greater of $10,000 or 35% of gross reportable amount for many trust events; 5% per month, capped at 25%, for unreported foreign gifts |
A Few Patterns I See Repeatedly: the taxpayer reported foreign interest on Schedule B but did not file the FBAR (the income is on the return; the FBAR is still required); the foreign company had no profit, so the taxpayer assumed there was nothing to report (Form 5471 is still required); the foreign LLC is disregarded for U.S. income tax (Form 8858 is still required); the foreign trust did not make a taxable distribution (Form 3520 and possibly Form 3520-A may still be required); the receipt from a non-U.S. relative was a gift, not income (for large foreign gifts, Form 3520 may still be required).
Income reporting and information reporting are separate compliance questions. During an audit, you have to answer both.
One Practical Word: do not casually file a late FBAR, Form 8938, Form 5471, Form 8865, Form 8858, Form 3520, or Form 3520-A during an audit without first developing a procedural strategy. Once the IRS has opened an examination, your options narrow. Some penalties are immediately assessable and are not subject to ordinary deficiency procedures. Reasonable-cause defenses depend on what you knew, what you told your advisor, and what advice you received. Get the facts and the file complete before you argue the penalty.
Step 9: Evaluate The Examiner’s Findings
When the examination closes, you will receive either an acceptance of the return as filed or a report of proposed adjustments. The possible outcomes:
| Outcome | Meaning |
|---|---|
| No change | The IRS accepts the return as filed for the issues examined. |
| Agreed adjustment | You agree to the IRS changes and sign the agreement form. |
| Partially agreed | You agree to some changes and dispute others. |
| Unagreed adjustment | You preserve your appeal rights and do not sign. |
| Penalty proposal | The IRS proposes penalties in addition to tax and interest. |
If you intend to appeal, do not sign the agreement page. If you partially agree, sign only what reflects the items you actually accept and continue to dispute the rest.
Step 10: The 30-Day Letter And Appeals
If you do not agree with the examiner’s proposed changes, the IRS generally issues a 30-day letter transmitting the examination report. You have 30 days to agree and sign, submit additional information, or request Appeals consideration.
The IRS Independent Office of Appeals is separate from the examination function. Appeals officers have broad settlement authority and are trained to consider the “hazards of litigation” — the risk to both sides of going to court. In my experience, Appeals is where most disputes that survive examination actually get resolved, often on terms that examiners cannot offer.
The form of the Appeals request depends on the amount in dispute. For $25,000 or less per tax period, you may use a small case request (Form 12203 or a brief written statement). For more than $25,000 per tax period, a formal written protest is required, signed under penalties of perjury, identifying the disputed adjustments, the amount in dispute, the facts supporting your position, the legal authority you rely on, and any disputed penalties with reasons they should not apply. The protest is the first impression Appeals gets of your case, thus draft it carefully.
Fast Track Settlement can be an alternative for appropriate cases. It keeps the case in examination jurisdiction while a trained Appeals employee acts as a neutral facilitator. You retain your normal appeal rights if Fast Track does not produce a settlement.
Step 11: The 90-Day Letter And Tax Court
If the matter is not resolved at examination or Appeals, the IRS issues a statutory notice of deficiency — the 90-day letter. You have 90 days from the date of the notice (150 days if the notice is addressed outside the United States) to file a petition with the U.S. Tax Court.
The 90-day deadline is one of the most important deadlines in tax practice. The IRS cannot extend it. Missing it forfeits your right to petition the Tax Court without first paying the tax. You can still litigate in U.S. District Court or the U.S. Court of Federal Claims, but only after paying the assessed tax and filing a refund claim.
| Forum | When Used | Payment Required First? |
|---|---|---|
| U.S. Tax Court | Within 90 days of a statutory notice of deficiency (150 days if addressed outside the U.S.) | No |
| U.S. District Court | Refund litigation after payment and a refund claim | Yes |
| U.S. Court of Federal Claims | Refund litigation after payment and a refund claim | Yes |
Tax Court has subject-matter expertise; District Court offers a jury option; the Court of Federal Claims has unique precedential authority for certain issues. Forum selection deserves serious analysis with experienced tax litigation counsel. A note on interest and payment: interest accrues on unpaid balances throughout the dispute, and paying part or all of a deficiency at the wrong moment can shift you out of the deficiency-jurisdiction track. These are strategic decisions, not clerical ones.
Step 12: Post-Assessment Options
Audit Reconsideration – The IRS will reconsider a prior audit if you present information that was not previously considered. This is most useful when the original audit closed without taxpayer participation, when records were unavailable at the time, or when a credit was reversed, and you now have proof it should be allowed. You do not have to pay first. But audit reconsideration is not a do-over for taxpayers who failed to respond on time; the IRS expects new information.
Refund Claims – A refund claim (Form 1040-X for individuals) must generally be filed by the later of three years from the date the original return was filed or two years from the date the tax was paid. If the IRS denies the claim, Appeals rights typically follow, and a refund suit becomes available if the claim is denied or not acted on within six months.
Common Mistakes To Avoid
The same mistakes recur in audit after audit: ignoring the notice; sending originals instead of photocopies; signing an agreement while intending to appeal; missing the 30-day letter deadline; missing the 90-day Tax Court deadline; producing an unorganized document dump; volunteering unrelated information; lying to the IRS or providing false documentation (this converts a civil audit into a criminal investigation — never do it); signing a statute extension on Form 872 without understanding the consequences; and treating audit reconsideration as a guaranteed second chance.
Final Thoughts
The taxpayers I see come out of audits in the best shape are the ones who treat the process with the seriousness it deserves and the discipline it rewards. They read the notice. They get representation early when the stakes warrant it. They organize their records. They answer only what is asked. They meet every deadline. They preserve their appeal rights. They do not sign away positions they intend to fight.
If you are facing an audit and want help thinking through your position before responding, my colleagues at CST Tax Advisors and I are here to help.