The letter arrives in a plain envelope from the Internal Revenue Service. The taxpayer’s name and address appear in the upper-left corner. There is a number in the upper right that means something to the IRS but very little to most taxpayers. The letter says, in language that is procedurally precise but emotionally cold, that the taxpayer’s federal income tax return for a particular year has been selected for examination.
The first thirty days after that letter arrives matter more than most taxpayers realize. Decisions made in the first month — how to respond, what to produce, who handles communication with the examining agent, and whether to involve counsel — tend to set the trajectory of the audit and, in many cases, the magnitude of the eventual tax adjustment. This article describes what those decisions are, in roughly the order they need to be made.
Read the Letter Carefully
Different IRS letters trigger different procedural rights and different deadlines. Letter 525 (the General 30-Day Letter) and Letter 692 (the Notice of Proposed Adjustment) are different from Letter 950 (the Notice of Proposed Deficiency, sometimes called the “30-day letter”), which is in turn different from a Statutory Notice of Deficiency under § 6212 (the “90-day letter” or “ticket to Tax Court”). The procedural posture is determined by which letter has been issued, not by what the taxpayer thinks the letter is.
Most field examinations begin with an opening letter and an Information Document Request (IDR), which lists the categories of documents the examining agent is requesting. The IDR is not a subpoena; it is an administrative request. But how the taxpayer responds to the initial IDR — what is produced, how it is organized, and what is withheld on privilege or other grounds — tends to define the scope of the audit going forward.
Do Not Ignore the Letter
This is obvious but worth saying because failure to respond is one of the most common mistakes. Ignoring an examination notice does not make the audit go away. It causes the agent to develop the case using third-party records, with no input from the taxpayer, and to issue findings that are then far more difficult to challenge. By the time the taxpayer realizes the matter is serious, the procedural posture has often hardened.
If the taxpayer cannot meet the initial deadline, calling the agent and requesting a reasonable extension — documented in writing — is almost always granted and almost always preferable to silence.
The Original CPA: Witness, Not Counsel
Most taxpayers’ first instinct when an IRS notice arrives is to call the CPA who prepared the return. That is a reasonable instinct in some cases and a problematic one in others. The CPA is often the person best positioned to explain how the return was prepared and to help organize records responsive to an IDR. But the CPA is also a fact witness whom the IRS can depose. Conversations between the CPA and the taxpayer about the return are not protected by attorney-client privilege.
Section 7525 provides a limited federally-authorized practitioner privilege for tax advice rendered by a CPA, but that privilege does not apply in criminal proceedings, does not apply to tax shelter promotion, does not extend to compliance work (return preparation itself), and is narrower in operation than the attorney-client privilege. In an audit that has any potential to involve substantial penalties, fraud allegations, or criminal referral, the limitations of § 7525 become important. Communications that the taxpayer wants to be privileged should occur with counsel rather than with the CPA, and counsel can engage the CPA under Kovel arrangements where the CPA’s technical assistance is needed within the privilege.
When to Engage Counsel
Not every audit requires counsel. Many ordinary correspondence audits and small-dollar field audits are well-handled by the original CPA, particularly where the issues are mechanical (substantiation of charitable contributions, basis verification, schedule classification) and where the dollars at stake are modest.
Counsel is generally advisable when one or more of the following are present:
• The dollars at stake are large in relation to the taxpayer’s circumstances.
• The issue involves a substantive legal position the IRS may challenge as lacking substantial authority — tax shelter participation, aggressive structuring, captive insurance, conservation easement, or similar.
• The IDR or the agent’s questions suggest interest in fraud or willfulness rather than in mechanical accuracy.
• The taxpayer’s intent or knowledge is going to be at issue.
• The audit may produce penalties under § 6662 or beyond, and a reasonable-cause defense will need to be developed and documented.
• The matter has crossed referral lines from the field examiner to IRS Criminal Investigation.
• The taxpayer may need to file an amended return, voluntarily disclose, or otherwise change posture.
If any of these is present, the cost of engaging counsel early is small relative to the cost of engaging counsel late. Many audits that could have been resolved at the field examination level escalate unnecessarily because the taxpayer’s position was not adequately developed in the early rounds.
Privilege, Records, and the Initial Response
Before producing documents in response to an IDR, the taxpayer (or counsel) should review what is being produced. Some documents may be privileged (legal opinions, communications with prior counsel). Some may be partially responsive but contain unrelated information that need not be produced. Some may not exist in the form the IDR requests, requiring a response that explains what does and does not exist. A wholesale dump of every document in the file is rarely the right approach — it produces collateral issues, expands the scope of the audit, and can waive privilege over documents that did not need to be produced at all.
Where privilege is asserted, the taxpayer should produce a privilege log that identifies the document withheld in enough detail for the agent (and ultimately a court) to evaluate the assertion, without disclosing the privileged content itself.
The Audit Is the Beginning, Not the End
Most audits do not end at the field examination level. If the agent proposes adjustments the taxpayer disputes, the next step is the IRS Independent Office of Appeals, where settlement is negotiated under hazards-of-litigation analysis. If Appeals does not resolve the matter, the next step is either Tax Court (after issuance of a Notice of Deficiency under § 6212) or refund litigation in federal district court or the Court of Federal Claims (after payment of the proposed deficiency and a refund claim).
What the taxpayer does in the field examination — what record is built, what positions are developed, what documents are produced, what is conceded and what is preserved — tends to determine how each subsequent stage unfolds. The decisions made in the first thirty days, in other words, often matter for years.