An IRS audit is stressful, especially if you've taken aggressive tax positions. At AE Tax Advisors, we help business owners and high-income professionals defend their returns and resolve IRS issues quickly. Our approach is proactive: we structure your tax position from the beginning so it's defensible if audited.
Common IRS Contact Types
A Correspondence Audit involves the IRS mailing a letter requesting documentation for specific items. A Field Audit involves an IRS agent visiting your business or home office. An Examination (the formal name) can be limited scope (a few items) or broad scope (your entire return).
Your Rights in an Audit
Under IRC 7605, you have the right to representation by a qualified tax professional. You don't have to speak directly with the IRS; we can handle all communications. You also have the right to appeal the IRS's findings. We provide full representation through appeals if necessary.
Documentation Matters
The IRS will request documentation: receipts, bank statements, invoices, mileage logs, contracts, business purpose statements. If you can substantiate all deductions, the audit typically ends favorably. If you can't document expenses, they're disallowed and penalties assessed.
We emphasize proactive documentation from day one. Every business deduction should be supported by records. Every charitable contribution should have a receipt. Every vehicle trip should be logged. This creates an audit-proof file from the beginning.
Cost Segregation Studies and Audit Risk
Some worry that taking large depreciation deductions (via a cost segregation study) invites an audit. Actually, cost seg studies reduce audit risk because they're based on detailed engineering analysis and tie directly to IRS guidance. If the IRS questions depreciation, we have the study (prepared by a licensed engineer) to defend the position.
S-Corp Elections and Reasonable Salary Scrutiny
The IRS closely examines S-corp salary levels. If you report $500,000 in business income, pay yourself a $50,000 salary, and distribute $450,000 as dividends, the IRS will likely disallow the distribution and reclassify it as wages. We ensure your W-2 salary is reasonable for services provided, often using industry benchmarks to justify wage structure.
Our Audit Defense Approach
Step 1: Receipt of IRS notice. When the IRS contacts you, you have specific response deadlines. We handle these immediately. Step 2: Document gathering. We work with you to assemble all documentation supporting positions on your return. Step 3: Submission to IRS. We prepare a response letter explaining positions, citing IRC rules and case law. Step 4: IRS examination. If the IRS auditor requests additional meetings, we coordinate and respond. Step 5: Resolution. The audit closes with either agreement, disagreement (we appeal), or compromise.
Throughout this process, you don't speak directly with the IRS. We handle all communication and negotiation.
Penalties and Interest
If the IRS finds underpayment, you'll owe tax plus interest (currently ~8% annually). Penalties vary: accuracy-related (20%), fraud (75%), etc. We work to minimize penalties by demonstrating reasonable cause for discrepancies. If you relied on professional advice, that often qualifies as reasonable cause to waive accuracy penalties.
Appeals Process
If you disagree with the IRS auditor's findings, you have the right to appeal to the IRS Appeals office, which is independent of the examination division. Appeals officers are often more willing to compromise than field auditors. We prepare an appeal brief supporting your position and represent you throughout appeals.
Getting Ahead of Audits
The best audit defense is positioning your return correctly from the start: Maintain documentation for all deductions. Support large or unusual items with detailed explanations. Treat similar items consistently year-to-year. Stay within clear case law. Disclose aggressive positions on Form 8275 to show transparency.
Following these practices doesn't guarantee you won't be audited, but it dramatically improves the odds you'll prevail if you are.