What happens during an IRS audit?

The IRS examines returns three ways (by mail, at an IRS office, or in the field) using its authority under 26 U.S.C. § 7602 to review books and records. The exam ends in a no-change letter or proposed adjustments; a taxpayer who disagrees can go to the Independent Office of Appeals, then Tax Court.

The audit notice identifies the year and the issues, and the format signals the stakes: correspondence audits cover narrow items like credits or deductions; office and field examinations reach entire returns and business records, under the examination authority of 26 U.S.C. § 7602. A taxpayer may be represented throughout by an attorney, CPA, or enrolled agent holding a power of attorney. The work is responding to information document requests; completely enough to be credible, carefully enough not to expand the exam. Three endings are possible: no change; agreed adjustments, which the taxpayer signs and pays or arranges to pay; or disagreement, triggering a 30-day letter and the right to the Independent Office of Appeals, which settles cases on the hazards of litigation. Still unresolved, the IRS issues a statutory notice of deficiency, opening 90 days to petition the U.S. Tax Court before paying (26 U.S.C. § 6213). Federal adjustments must then be reported to the Franchise Tax Board, which follows with its own assessment.

Authority: 26 U.S.C. § 7602