The Truth About IRS Audits
Most clients think an IRS audit starts with a knock at the door.
It doesn’t.
It usually starts with a letter, a mismatch, and a 30-day deadline most people never see coming.
IRS Audits
An IRS audit isn’t always a full-scale financial inquisition. In fact, many “audits” aren’t "audits" at all. They’re compliance letters designed to squeeze additional tax revenue without ever assigning a human being to the file.
Still, these not-audit audits can freeze your client’s business transactions, wreck their loan application, complicate a divorce, or delay a tax-sensitive settlement.
Why This Matters to You
Your clients look to you—whether you’re their CPA, attorney, financial advisor, or real estate professional—for stability.
When something goes sideways with the IRS, you’re the first call.
And if you understand what triggers these IRS actions, how they unfold, and how to help your clients understand the "audit" letters they're receiving, you become more than a service provider. You become their go to resource.
5 Things You Need to Know When Your Client is Facing an IRS "Audit"
1. A Mismatched 1099 Will Trigger a Letter From the IRS Every Time
Every tax return is scanned by IRS systems and compared against information submitted by third parties. If a return doesn’t match the W-2s, 1099s, or K-1s filed under your client’s name, the IRS generates a CP2000 letter.
It’s not an audit. But it's substantially similar. The letter accuses the taxpayer of underreporting income and proposes additional tax—along with penalties and interest—unless a response is submitted within 30 days.
That’s how it usually starts: not with fraud, but with a title company listing the wrong SSN on a 1099 or a brokerage firm reporting the full sale amount under one heir’s name instead of three.
It's one error. One oversight. One mismatch.
2. The IRS Doesn't Target Specific People But It Doesn’t Pull Returns Out of a Hat
The myth is false.
IRS employees can’t audit someone because they don’t like them. Not a celebrity. Not a politician. Not a neighbor.
If a Revenue Agent suspects another taxpayer (say, someone who paid your client a deductible expense they claim was a gift), they must write a memo and route it up the chain for approval. Even if approved, they can’t conduct the audit themselves. It must be reassigned to another agent.
Nevertheless, audits aren't completely random, either. They use algorithms—DIF (Discriminant Function Score) and UIDIF (Unreported Income DIF)—to identify statistical anomalies.
➲ Here’s generally how the IRS chooses:
Low-income taxpayers claiming refundable credits like the Earned Income Tax Credit. These are flagged due to high error rates.
High-income earners because the financial upside of finding an error is greater. These taxpayers also tend to engage in more complex planning—partnerships, real estate strategies, trusts, and shelters.
Self-employed individuals with large Schedule C losses, high vehicle mileage, or high home office deductions. Section C losses, especially if those losses offset W-2 wages. The IRS can’t match deductions like it does income, so excessive write-offs raise red flags. Vehicle mileage because it's easy to see when excessive mileage doesn't seem to match the profession. And home office deductions because people always do it wrong.
If your client falls into one of these groups, the odds of hearing from the IRS go up—whether they did anything wrong or not.
3. The IRS May Be Understaffed—But Their Robots Aren’t
Everyone seems to think that the IRS layoffs mean they're less likely to get in trouble.
Not true.
Even with fewer employees, the IRS still processes every return through automated systems. Those systems look for mismatches, flag high-risk returns, and issue compliance notices like CP2000s automatically.
And if the notice goes unanswered? The IRS assumes the taxpayer is wrong and makes the adjustment. No audit necessary. No Revenue Agent assigned. No negotiation necessary.
So, yes—there may be fewer human audits. But AI is running smoothly.
4. Most Audits Focus on One Issue—Keep It That Way
Contrary to popular belief, the IRS usually isn’t looking to comb through your client’s entire return. Most audits are targeted. They want clarification on one item—a charitable deduction, a rental expense, a business loss.
The mistake many taxpayers (and even professionals) make is over-disclosing. They dump a mountain of paperwork in the IRS’s lap, thinking more is better. It’s not. And more gives the agent more room to expand the audit.
➲ Rule of thumb:
| ✅ Do | ❌ Don’t |
|---|---|
| ✅ Respond to exactly what they ask for | ❌ Don’t offer more than is required |
| ✅ Bring documents to the IRS office | ❌ Don’t invite them to your client’s home or business |
Field visits open the door to overextensive questions, expanded inquiries, and new exposures that aren't necessary.
5. The IRS Can—and Sometimes Will—Go Back Years
If the issue involves something like the sale of a rental property, the IRS may request purchase documents to calculate basis—even if the purchase happened years ago.
They’re not limited to the year under audit if earlier transactions impact the current issue. And while most agents prefer to stay within the year they're reviewing, they are able to ask for records that connect the dots.
That’s why documentation—especially on property, depreciation, carryovers, and major deductions—matters long after the tax year ends.
TL;DR – IRS Audit Survival Guide for Professionals
⏩ CP2000 notices are triggered by mismatched third-party forms
⏩ Strict rules exist to prevent audit abuse, bias, or unauthorized access.
⏩ High-risk profiles include low-income (with credits), high-income (with shelters), and self-employed (with losses)
⏩ IRS automation continues to enforce compliance—even with fewer agents
⏩ Respond surgically—only answer what’s asked to avoid audit expansion
⏩ The IRS can reach back as far as necessary to verify basis or eligibility
Let's Talk...
➤ What’s the most surprising IRS notice or audit issue you’ve helped a client navigate?
➤ Was it an audit of a return you prepared? Did you handle the audit yourself? Or send it to someone else?
