How an IRS Audit Should Really Be Handled

Why Experience and Control Matter

An IRS audit is not a paperwork exercise. It is a structured examination conducted by a trained Revenue Agent whose job is to test deductions, question income, and identify weaknesses in a taxpayer’s position.

Many taxpayers — and unfortunately many tax professionals — fundamentally misunderstand this process.

The Common (and Costly) Misconception

Revenue Agents issue Information Document Requests (IDRs). Many representatives respond as follows:

• IRS issues an IDR

• Tax professional gathers documents

• Documents are submitted

• IRS moves on to the next request

This approach is wrong — all wrong.

It allows the IRS to control:

• The pace of the audit

• The scope of the inquiry

• The narrative of the examination

Passive representation almost always disadvantages the taxpayer.

The First Principle of Proper Representation: Audit the Return Before the IRS Does

An experienced tax professional performs an internal audit before the IRS completes its review. That internal audit identifies:

• Strong deductions

• Weak or marginal deductions

• Areas requiring explanation rather than documents

• Likely IRS points of attack

Preparation allows the professional to shape the audit, not chase it.

If the professional prepared the return, they already know:

• Why deductions were taken

• What evidence truly supports them

• What explanations matter most

If the professional did not prepare the return, the internal audit will reveal the issues.

This knowledge is critical because the evidence that proves a deduction is often very different from what the Revenue Agent initially asks to see.

Evidence Is Defined by Law — Not IRS Preference

U.S. Tax Court has consistently held that deductions need only be proven as more likely than not valid. Two things must be proven 1) that the expenditure was for business purposes and 2} its amount.

Important principles:

• The IRS does not get to invent proof standards

• Documentary evidence is helpful, but not exclusive

• Credible verbal testimony may be sufficient in appropriate cases

One of the strongest sources of proof in nearly every audit is:

• The taxpayer’s bank statements

Bank statements often provide contemporaneous evidence of:

• Business expenditures

• Timing and consistency of payments

• Patterns supporting business purpose

An experienced tax pro knows how to use such documents for the advantage of the taxpayer.

Bank Deposits Are Not Automatically Income

A common IRS error is treating all bank deposits as taxable income.

Deposits may represent:

• Loans

• Gifts

• Transfers

• Returns of capital

• Other non-taxable sources

It is the tax professional’s role to:

• Identify these deposits

• Explain their nature

• Prevent improper income reclassification

Gray Areas Must Be Addressed Head-On

Some expenses are marginal.

They may be:

• Business or personal

• Mixed-use in nature

• Subject to skepticism

The difference between allowance and disallowance often depends on:

• Early identification

• Clear explanation

• Prompt presentation

Hesitation invites disallowance.

Control the Examination — Do Not Surrender It

An experienced representative does not simply submit documents and wait.

They actively monitor:

• What evidence the Revenue Agent accepts easily

• What causes hesitation or resistance

• Where clarification is needed

This allows the professional to:

• Supplement the record intelligently

• Address concerns before positions harden

• Preserve credibility

Escalation Is a Tool — Not a Threat

Effective audit defense always keeps escalation options available:

• Revenue Agent’s manager

• IRS Appeals

• U.S. Tax Court

Each level offers:

• Greater legal sophistication

• Increased receptiveness to case law

• Opportunities for reasonable resolution

The ability and willingness to escalate — used properly — is a powerful tool of persuasion.

Using the Taxpayer Bill of Rights Effectively

The Taxpayer Bill of Rights is often dismissed as “all bark and no bite.”

That is only true for those who do not know how to use it.

Experienced professionals use it to:

• Enforce procedural fairness

• Curb overreach

• Frame disputes appropriately

  Quietly, but effectively.

Why Choose Our Firm

IRS audits are not theoretical exercises.

They involve real money, real risk, and real stress.

Clients choose our firm because:

• We do not react to audits — we control them

• We understand how Revenue Agents think

• We know what evidence matters under the law

• We are comfortable dealing with managers, Appeals, and Tax Court

• We focus on strategy, credibility, and outcomes

Experience is not optional in an IRS audit.

It is decisive.

Frequently Asked Questions

What is an IRS audit?

An IRS audit is a formal examination of a tax return to verify income, deductions, and credits. It is not an accusation, but it is an investigation.

Does an audit mean I did something wrong?

No. Many audits are selected automatically or randomly. Once initiated, however, the IRS will look for weaknesses.

Should I just give the IRS what they ask for?

Not necessarily. The IRS asks for documents for its convenience — not based on what best proves your case.

What proof does the IRS actually need?

Proof that a deduction is more likely than not valid. Not perfection. Not excess documentation.

Are bank deposits always income?

No. Deposits may be loans, gifts, transfers, or other non-taxable sources that must be explained properly.

What if the IRS disagrees with our position?

Disagreements can be escalated to managers, IRS Appeals, or Tax Court. Each level offers opportunities for resolution.

Why does experience matter so much?

Because audits involve judgment, persuasion, and strategy — not checklists. Experience determines outcomes.