Steps to take after receiving an audit/examination notice:
Determine whether you will represent yourself or appoint a representative. The answer to this question should depend on (1) how frazzled you would be self-representing, (2) your familiarity with the applicable tax code, and (3) whether you took any “aggressive” positions on both the tax return under audit and any prior years. Since the IRS conducts very few totally random audits, chances are your return contained one or more entries identified as potentially abusive by the IRS’s compliance algorithm. If so, you should strongly consider hiring a representative—preferably one who did not prepare the tax return to act as a buffer when the IRS agent directly asks why certain positions were taken on the return.
Try to limit the scope of the audit. The standard Information Document Request sent by the IRS agent is worded very broadly, even though the agent may only be tasked with looking at a handful of items. Oftentimes the agent will agree to initially narrow the categories of documents and information you are required to produce.
Document, document, document. Aside from the innocuous background questions the agent asks, you should demand that all other questions or document requests be made in writing. When responding, do so in writing by drafting a cover letter which identifies the agent’s request you are responding to, and describes in detail the documents you are producing. This will ensure you create a precise record of what transpired during the audit if your case proceeds to the Office of Appeals or even Tax Court.
Don’t be afraid to disagree and negotiate. In my experience, IRS field agents tend to rigidly apply the law in favor of the Treasury.. If at the end of the audit you think the agent got it wrong, file a protest to take your case to the Office of Appeals where the Appeals officers are typically more taxpayer-friendly in their analysis. In addition, unlike field agents, Appeals officers are allowed to consider the hazards of litigation when negotiating a settlement. This almost always means a better result for you.