EA Part 3 IRS Audit Procedures: Correspondence, Office, and Field Examinations

The Three Types of IRS Audits

The IRS conducts examinations through three formats, each suited to different levels of complexity.

The correspondence audit is the most common type. The IRS sends a letter asking the taxpayer to verify specific items on a return — often a deduction, credit, or income item that can be substantiated by mailing documentation. No in-person meeting is required. Correspondence audits are typically handled by IRS Service Centers rather than field offices and are best suited for straightforward issues with clear documentary resolution.

As an EA representing a client in a correspondence audit, you generally respond by mail with supporting documents and a Form 2848 on file. These are often the most efficient examinations to resolve.

Office Examinations

Office examinations require the taxpayer or their representative to appear at an IRS office. They are more complex than correspondence audits but less involved than field examinations. Issues examined often include business deductions, rental income, or itemized deductions that require a more thorough review than can be accomplished by mail.

Field Examinations

Field examinations — also called field audits — take place at the taxpayer's home, place of business, or the representative's office. They are conducted by Revenue Agents and are reserved for complex returns involving business income, international issues, or large deductions. Field audits allow the IRS to review books, records, and business operations directly.

How Returns Are Selected for Audit

Understanding audit selection methods is tested on Part 3.

DIF Scoring (Discriminant Function System): The IRS uses a statistical scoring system to identify returns with a higher likelihood of underreported income or overstated deductions. Returns with high DIF scores are reviewed by Examination personnel who decide whether to open an audit.

Document Matching (Automated Underreporter Program): IRS computers match returns against third-party information returns (W-2s, 1099s). Discrepancies trigger notices — typically CP2000 — which are not technically audits but can lead to one.

Related Examinations: An audit of a partnership, S corporation, or business may trigger examinations of related parties, including investors or officers.

Whistleblower Claims: Informants may submit claims to the IRS Whistleblower Office, which can initiate an examination.

National Research Program: The IRS periodically conducts compliance research audits on a statistically random sample of returns.

Statute of Limitations

The statute of limitations is one of the highest-yield topics within audit procedures.

3-year rule: The IRS generally has 3 years from the later of the return due date or the date the return was filed to assess additional tax.
6-year rule: If a taxpayer omits more than 25% of gross income from a return, the statute extends to 6 years.
Unlimited: There is no statute of limitations when a return is fraudulent, when a return was filed with the intent to evade tax, or when no return was filed at all.

The statute of limitations can be extended by mutual agreement using Form 872 (Consent to Extend the Time to Assess Tax). A taxpayer has the right to refuse to sign a Form 872, but refusal may prompt the IRS to issue a notice of deficiency before the statute expires.

Taxpayer Rights During an Audit

The Taxpayer Bill of Rights (Publication 1) guarantees specific protections during examination. Key rights that appear on Part 3 include:

The right to know why information is being requested
The right to professional and courteous treatment
The right to representation by a qualified practitioner
The right to record an interview (with advance written notice to the IRS)
The right to suspend an interview to consult a representative (unless the taxpayer initiated the interview)

Taxpayers also have the right to not be interviewed after submitting a written request for representation. Once a taxpayer invokes this right, the IRS agent must stop questioning.

Appeals Within the Examination Process

If a Revenue Agent's examination results in proposed adjustments the taxpayer disagrees with, the process does not immediately proceed to a formal notice of deficiency.

The agent issues a Revenue Agent's Report (RAR), also called a 30-day letter, which gives the taxpayer 30 days to request a conference with an IRS Appeals Officer. This is a critical step — the IRS Office of Appeals is independent of the Examination function and resolves the majority of disputes without litigation.

If the taxpayer does not respond or does not reach agreement with Appeals, the IRS issues a Statutory Notice of Deficiency (90-day letter), which starts the clock for Tax Court petition rights.

Closing Agreements

A closing agreement under IRC Section 7121 is a binding final agreement between a taxpayer and the IRS on a specific tax liability or issue. Once executed, a closing agreement cannot be reopened except for fraud, malfeasance, or misrepresentation of material facts. Closing agreements are used to resolve disputes definitively and are particularly useful when the same issue could recur in future years.

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