Tax Defense ✦ Audits
An IRS Audit Is a Records Contest. Bring a CPA.
The IRS examiner’s report is a set of numbers. Beating it means producing a better set, organized the way the examiner has to review them, by the deadline on the letter. North Star Law Firm represents Colorado individuals and businesses in correspondence, office, and field audits, and manages the Colorado Department of Revenue fallout that follows every federal adjustment.
Overview
What happens in an audit, and what we do about it
An audit starts with a letter identifying the years and items under examination. From there the examiner requests documents, tests them against the return, and issues a report proposing adjustments. Our job is to control that process: file the power of attorney so the IRS deals with us, keep the scope to what was asked, produce records that answer the question completely, and negotiate the adjustments the records don’t support. Where the report is wrong, we take it to Appeals or the Tax Court. Where it is right, we minimize the penalty and set up the Colorado amendment so the state side doesn’t become a second problem.
- Power of attorney filed; IRS contact runs through us
- Document requests answered completely and on time
- Records reconstructed by a CPA when originals are missing
- Scope held to the items in the notice
- Examiner’s report reviewed line by line before you sign anything
- Penalty defenses raised at the audit stage, not after
- Colorado amended return prepared from the final federal figures
- Appeal or Tax Court petition filed if the report is wrong
Types of Audits
The three audits, and how each one goes
| Audit type | What it looks like | Where the risk is |
|---|---|---|
| Correspondence audit | Letters from a service center asking for proof of specific items | Missed deadlines and incomplete responses; most defaults happen here |
| Office audit | Meeting at an IRS office (Denver, Colorado Springs, Grand Junction, or by video) on a defined list of issues | Volunteering information beyond the list; sloppy records |
| Field audit | Revenue agent examines business records, often at the business or the representative’s office | Bank deposit analysis, unreported income, and the agent expanding into other years |
Business audits in Colorado frequently start with sales tax rather than income tax, because the Department of Revenue and home-rule cities audit sales and use tax independently. A state sales tax audit that finds unreported sales is routinely referred for income tax follow-up, so the two are handled together.
The Attorney-CPA Difference
The examiner reads your books. So do we, first.
Before the IRS sees a document, we have tested it. A bank deposit analysis is run on our side to find what the examiner will find; unexplained deposits get explained before they become income; the QuickBooks file is cleaned up before it is produced. That preparation is CPA work, and it is why audits handled by an attorney-CPA tend to close with fewer adjustments and no expansion to other years.
- Pre-audit review of every year under examination
- Bank deposit analysis run before the IRS runs it
- Business records organized to the examiner’s own workpaper format
- Privileged communications throughout
- Colorado consequence computed alongside the federal report
Questions & Answers
IRS Audit Defense questions, answered
What are the odds my audit is a correspondence audit?
High. The large majority of IRS audits are conducted by mail from a service center and target a handful of items: Schedule C income and expenses, the earned income credit, rental losses, and unreported 1099 income. They are also the audits where taxpayers lose by default, because the response window is short and the letters are easy to ignore. A complete, organized response by the deadline resolves most of them.
Should I talk to the auditor myself?
No. Once we file a power of attorney (Form 2848), the IRS communicates with us. Taxpayers who speak with examiners directly volunteer information, agree to expand the scope, and make statements about records that turn out to be wrong. The examiner’s job is to find adjustments; ours is to limit the audit to what the notice asked about and answer that fully.
What if I don’t have receipts?
Records can be reconstructed. Bank and card statements, vendor histories, mileage logs rebuilt from calendars, and the Cohan rule (which allows reasonable estimates for some expenses when the underlying activity is proven) all have a place. What doesn’t work is guessing. As a CPA practice we rebuild the records the way an examiner will test them.
Will Colorado audit me too?
Colorado usually doesn’t need to. When the federal audit closes with an adjustment, you must file an amended Colorado return within 30 days of the final federal determination, and the Department of Revenue assesses the flat-rate difference plus interest. If you don’t report the change, Colorado’s assessment period stays open. We compute and file the Colorado amendment as part of closing the federal audit.
The audit is over and I disagree. What now?
You have appeal rights. A 30-day letter lets you take the case to the IRS Independent Office of Appeals; a 90-day notice of deficiency lets you petition the U.S. Tax Court, which sits in Denver, without paying first. Those deadlines are strict, so the time to call is when the examiner’s report arrives, not after.
Talk to an attorney-CPA before you talk to the IRS.
A free consultation, a plain-English assessment, and a flat fee in writing if you decide to move forward.