Tax Return Audits: Process, Deadlines and Your Rights

Understanding a Tax Return Audit and Your Rights

A tax return audit checks whether reported information complies with tax law. Knowing the process helps you respond to an IRS or state examination. Start with these essentials:

Key Facts About Tax Audits

Purpose: Review the return and supporting records for accuracy.
Agency: The IRS handles federal examinations; the relevant state tax agency handles state returns.
Contact: The IRS initially notifies you of an audit by mail. State procedures may differ.
Selection: Statistical screening, random research selection or a related examination may lead to an audit.
Format: Correspondence, an IRS office meeting, or a field examination at a suitable location.
Timing: The usual federal assessment period is 3 years, subject to important exceptions described below.
Result: No change, agreed changes or disputed findings; additional tax or a refund may result.

Selection does not prove wrongdoing. Keep records that explain the entries on your return rather than assuming that a notice establishes an error.

Duration depends on complexity, records and unresolved issues. Interest and applicable penalties can increase an unpaid balance; response and appeal deadlines still matter.

Segal, Cohen & Landis (SCL) assists taxpayers with audit responses and disputes. The appropriate approach depends on the notice, evidence and applicable law.

What Is a Tax Audit, and Why Was My Return Selected?

An examination checks income, deductions, credits and other reported items. Computer screening can compare returns with statistical norms, but a difference alone does not establish an incorrect return.

The IRS explains examination selection, procedures and rights in its audit guidance.

Issues That Can Prompt Questions

Income differences: Compare the return with Forms W-2 and 1099. A CP2000 proposed adjustment is a separate matching inquiry, not itself an audit or a bill.
Complex income: Investment, business or international transactions may require additional documentation. Income level alone does not establish an error.
Deductions: Retain eligibility and payment evidence, including for deductions that are large relative to income.
Business losses: Repeated losses may raise questions about profit motive and whether deductions satisfy the applicable rules.
Math errors: A mathematical-error adjustment is not necessarily an examination. Follow the notice's specific response and dispute instructions.

How Selection Works

The IRS uses statistical screening and random research selection, including through its National Research Program. It may also examine a return related to another taxpayer or business under examination.

An examination is an opportunity to substantiate the return. Selection alone is not an accusation of tax evasion.

A representative can help organize evidence, identify disputed issues and explain available options. No particular result is guaranteed.

Federal and State Audits: Key Differences

The IRS applies federal tax law to federal returns, including Form 1040. State agencies apply their own laws; California's Franchise Tax Board administers state personal income and corporation franchise and income taxes.

The comparison below highlights differences that may affect your response:

Feature	Federal IRS examination	State examination, including California FTB
Agency	Internal Revenue Service	The state agency responsible for the tax at issue
Law applied	Federal tax law	State tax law, which may differ from federal law
Issues examined	Income, deductions, credits and other reported items	Residency, multi-state activity, state credits and other state-law issues
Usual assessment limit	Generally 3 years from filing or the original due date, whichever is later; exceptions apply.	California generally requires mailing a proposed deficiency notice within 4 years of filing or the original due date, whichever is later; exceptions apply. Other states differ.

Can One Agency's Audit Affect Another Agency?

Federal and state agencies share information, but an adjustment does not automatically establish a liability under both systems. California reporting obligations can arise after federal changes. FTB Publication 1008 explains taxpayer-specific reporting rules and the general 6-month deadline after a final federal determination. Do not assume agency information sharing satisfies your own duty.

Issues in State Examinations

State law can require analysis beyond the federal return:

Residency: The agency may examine domicile, time spent in the state and other connections under the relevant residency rules.
Multi-state activity: Offices, employees or sales may create a taxable connection, depending on the tax, statutory thresholds and applicable protections.
State credits: Eligibility and documentation requirements may differ from federal rules.

The Audit Process, Timing and Results

The IRS initially contacts you by mail. Use its notice guidance to check the letter. The usual assessment deadline is 3 years from actual filing or the original due date, whichever is later. Omitting more than 25% of gross income can extend it to 6 years. A fraudulent return intended to evade tax or no return can leave the period open indefinitely. Other extensions and exceptions apply. These are assessment rules, not a promised audit completion date.

3 Common Audit Formats

The notice explains the format and the information needed:

Correspondence examination: Provide requested evidence through the channel specified in the notice; available submission methods depend on the case.
Office examination: Meet at an IRS office to discuss records and disputed entries. You may represent yourself or authorize an eligible representative.
Field examination: Review may occur at your home, business or representative's office. Scope and complexity vary; professional assistance can help but is not automatically required.

Possible Results

An examination may end in one of the following ways:

No change: The examiner accepts the items reviewed.
Agreement: You accept proposed changes. Review the report and the effect of any agreement before signing; additional tax or a refund may follow.
Disagreement: You dispute proposed changes and consider the available administrative or judicial remedies and their deadlines.
Additional liability: Tax may be due, with applicable penalties and interest. Penalties are not automatic. Interest on unpaid tax generally runs from the payment due date, not the date the audit begins; penalty-interest rules differ.
Refund: An overpayment may be identified, subject to applicable refund requirements and time limits.

Can an Audit Lead to Criminal Proceedings?

A civil examination may uncover indications of fraud and lead to a criminal referral. Tax evasion and other willful violations can carry criminal consequences; an ordinary error alone does not establish a crime. Obtain legal advice promptly if intentional misconduct is alleged. Learn about tax-fraud risks.

Preparing for and Responding to an Audit

Use the notice to plan your response:

Respond on time: Ignoring a request may lead to proposed changes based on available information. Track the stated deadlines; do not assume a requested extension has been granted.
Gather records: Collect the receipts, statements and other evidence requested. Organize them by issue and retain a complete copy of the response.
Answer accurately: Supply complete, truthful information responsive to the request. Clarify unclear demands and discuss privilege with counsel; do not conceal responsive evidence. Send copies when requested and retain originals.
Consider representation: You can act for yourself or authorize an eligible professional. A tax attorney can address legal issues, while the right choice depends on the dispute and the practitioner's qualifications.

Taxpayer Rights

IRS rights include fair treatment, privacy, confidentiality and retaining an authorized representative. You can challenge IRS positions and seek an independent appeal in many circumstances, subject to procedural rules and deadlines. Read Publication 1, Your Rights as a Taxpayer.

If You Disagree with the Findings

The appropriate path depends on the case and notice:

Ask for a conference with the examiner's manager to discuss unresolved issues.
Consider Fast Track mediation if eligible. An Appeals mediator helps the parties negotiate but cannot compel participation or acceptance of a settlement.
Request review by the IRS Independent Office of Appeals when available, following the notice's instructions and deadline.
Where jurisdiction exists, petition the U.S. Tax Court by the applicable deadline. A deficiency petition generally must be filed within 90 days after the notice is mailed, or 150 days if addressed to a person outside the United States. You may represent yourself or use a practitioner admitted to that court, including a qualified nonattorney. Do not wait for administrative discussions to finish before protecting a court deadline.

Get advice on the available route and timing. Read about disputing an IRS audit.

Frequently Asked Questions

These questions address common practical concerns:

What Items Need Careful Documentation?

No single item proves that an audit will occur. Keep evidence supporting the following:

Complex income: Reconcile investment, business and other income with supporting statements.
Deductions: Document the amount, payment and legal eligibility for each claim.
Vehicle use: Substantiate business mileage and distinguish personal use; a claim of 100% business use needs support.
Business losses: Keep evidence of business activity, expenses and profit motive.
Information differences: Reconcile Forms W-2 and 1099 with the return and investigate inaccurate information reports.

How Far Back Can the IRS Examine a Return?

Assessment is generally limited to 3 years from filing or the original due date, whichever is later, with 6 years for certain omissions exceeding 25% of gross income. Fraudulent returns intended to evade tax, nonfiling and other statutory exceptions may extend or remove the limit. Keep records for the applicable period, including longer retention for property basis, carryovers or unresolved matters. 7 years is not a universal disposal rule. See IRS recordkeeping guidance.

Who Can Represent Me?

You may represent yourself. Attorneys, CPAs and enrolled agents who are eligible to practice have broad IRS representation rights. Certain other representatives have limited rights; preparing a return alone does not confer unrestricted representation authority.

Tax attorneys: Provide legal advice. Confidential legal communications may be privileged, subject to limits; routine return preparation is not automatically protected. Tax Court representation requires separate admission.
Certified public accountants: Can address accounting records and tax disputes within their professional competence and practice eligibility.
Enrolled agents: Federally licensed tax practitioners with broad IRS representation rights, subject to practice requirements.

Check credentials, current eligibility and relevant dispute experience before appointing a representative.

When to Seek Professional Help

Read the notice, preserve records and identify deadlines first. Professional advice can help you assess the evidence and available remedies.

Consider consulting a tax attorney when:

The disputed tax or penalties are substantial.
The issues involve a business, complex investments or multiple states.
There are allegations of fraud or other intentional misconduct.
You need help managing communications, legal questions or appeal deadlines.

Segal, Cohen & Landis assists with federal and state tax disputes for clients in Los Angeles, throughout California and elsewhere in the United States, subject to applicable representation rules.

Discuss your notice and options with our team. Learn about IRS audit representation.