How IRS examinations work: correspondence, office and field audits from first letter to closing

The three formats

The IRS runs examinations in three formats, and the format decides who your client deals with, how documents move and how quickly the case reaches a report. The Small Business/Self-Employed (SB/SE) procedures in IRM 4.10.2 set out the letters for each. Large corporate and partnership cases follow a separate process under IRM 4.46, covered in LB&I examinations.

Correspondence exams are meant for the campus. IRM 4.10.3.17 tells field offices that “Every attempt should be made to limit correspondence examinations at field locations.” If a field TCO or agent is handling a case by mail, that is unusual and worth asking about. The campus process, its letters and its suspense periods are covered in detail in correspondence examinations.

How returns are picked

Pub 3498 (Rev. 5-2025) lists three common selection routes: random selection and computer screening against norms for similar returns, related examinations (a business partner or investor whose return is under exam), and third-party documents such as Forms W-2 and 1099 that do not match the return. Pub 556 adds the Discriminant Inventory Function System (DIF) score and information from outside sources that the IRS evaluates for reliability before using it. Matching programs that work without an examiner, such as the Automated Underreporter program that issues the CP2000, are not examinations in the IRM 4.10 sense, even though clients often call them audits.

Do not expect the IRS to tell you why the return was picked. IRM 4.2.5.6 lists DIF scores as information examiners should not release, because they could reveal how returns are selected.

The opening letter and first call

IRM 4.10.2.8 is blunt: “ALL initial taxpayer contacts must be made by mail using approved form letters.” An unannounced visit or a cold call claiming to open an audit does not follow that procedure. The letter goes to the last known address, and examiners must send Pub 1 and Notice 609 to the taxpayer with it. Before mailing, the examiner checks the Centralized Authorization File; if a valid power of attorney covers the years, the representative receives a copy with Letter 937. For a joint return, separate letters go to each spouse.

The office and field call-back letters give the taxpayer 14 calendar days to respond, including mailing time. If nobody responds and the letter was not returned, IRM 4.10.2.8.3 has the examiner follow up by phone (and with the representative, if one is on file), then reissue the letter or send Letter 2295 by certified mail. Letter 2295 warns that the liability will be changed based on information on hand or that a summons may be issued. In an office exam that goes unanswered after certified delivery, the TCO can issue a report disallowing the expenses under examination once minimum income probes are done.

If the taxpayer says on the first call that they want representation, IRM 4.10.2.9.1 requires the examiner to allow at least 10 business days to secure it before following up. Once a valid Form 2848 is received, the appointment must be scheduled with the representative. The examiner's first call also covers who the examiner is: RRA 98 section 3705 requires examiners to give their name and identification number, and the group manager's name and phone number during the initial conversation.

Where the exam happens

IRC 7605(a) gives the IRS the choice of time and place, but the time and place must be ones “as may be fixed by the Secretary and as are reasonable under the circumstances.” Treas. Reg. 301.7605-1 fills that in. Under IRM 4.10.2.9.2, an office exam is held at the IRS office closest to the taxpayer's residence that has the right staff; a field exam is generally held where the original books and records are kept, usually the principal place of business, and covers every phase there, through the closing conference.

For representatives the important sentence is this one: “Generally, the location of a taxpayer's representative will not be a consideration in determining the place of the examination.” A request to move a field exam to your office needs a reason the regulation recognizes, and IRM 4.10.2.9.2.1 governs those requests. Revenue agents are also told not to copy records only to keep working somewhere else, and to tour the business when facts such as inventory can only be confirmed on site. Reasonable accommodation requests for a disability must be considered, and an examination can be moved to correspondence where the issues allow.

The middle of the exam

Information document requests

Form 4564, the information document request (IDR), lists what the examiner wants and by when. Office cases get a focused IDR with the initial contact letter; field cases get a detailed IDR with the appointment confirmation letter (Letter 3253, or Letter 3254 when the appointment is with the representative). IRM 4.10.2.10.1 sets the standard for every IDR: “Requests should be specific and should avoid requesting more information than is essential to resolve the issues identified.” Our guide to IDRs and the enforcement process covers responses, extensions and the LB&I enforcement ladder.

Interviews and tours

The initial interview is where the examiner learns the business, the books and the financial history. IRC 7521 governs it: the right to have it suspended to consult a representative, the right to record it on 10 days' notice, and the representative's right to attend in place of the taxpayer unless a summons is issued. See taxpayer interviews and the right to representation.

Required filing checks

Every income tax exam includes required filing checks under IRM 4.10.5: the examiner looks at prior and subsequent years, related returns, employment tax returns and information returns. On information returns, the IRM instruction is that “Expenses on the income tax return under audit must be reviewed for information return filing requirements and the findings documented even if the expenses are not audited.” A business client that paid contractors without filing Forms 1099 can see an information return penalty case or a backup withholding case opened from an income tax exam (IRM 4.10.5.6.2 and 4.10.5.6.3). For that side of an exam, see the payer guides at backup withholding examinations.

Scope

The scope can grow. Under IRM 4.10.2.7.1.2, office examiners need group manager approval to raise new issues beyond the classification sheet, while field agents set the scope themselves; either way, if another year is added, the taxpayer must be told orally or in writing (Letter 5968 for written notice) and given time to extend the power of attorney and gather records.

The internal clocks examiners work to

Several deadlines drive examiner behavior, and knowing them explains requests that otherwise seem arbitrary.

When the statute is close, expect a request to sign Form 872. Whether to sign, and on what terms, is covered in Form 872 statute extensions and the underlying rules in the assessment statute of limitations.

How an exam ends

Pub 3498 describes three outcomes: no change, agreed and unagreed. IRM 4.10.7.5.1 says that “Generally, a report will not be mailed to the taxpayer prior to discussing findings and proposed issues with the taxpayer and/or the representative,” with exceptions for no-shows, uncooperative taxpayers and cases where more records are being submitted. Office examiners generally issue a report at the end of the first face-to-face appointment unless income needs more work, more years are being pulled in, penalty approval under IRC 6751(b) is still pending, or the manager is not available to sign.

1. No change. The return is accepted as filed; the taxpayer gets a no-change report and later a final letter (Letter 590 or 992). See closing an examination.
2. Agreed. The taxpayer signs Form 4549 (or a waiver such as Form 870) and pays or arranges payment. Signing waives the right to a pre-assessment appeal on those adjustments; see what agreeing means.
3. Unagreed. A group manager conference is offered. If the issues stay open, the options under IRM 4.10.7.5.5 are Fast Track Settlement for eligible cases, a formal appeal, paying and claiming a refund, or receiving a notice of deficiency and petitioning the Tax Court. The report goes out with a 30-day letter (Letter 915 in office exams, Letter 950 in field exams) and Pub 3498.

If the 30-day letter is not answered with a protest or small case request, the case goes to Technical Services for a notice of deficiency. The report itself, Form 4549 and its attachments, are explained in the revenue agent's report.

On payment, Pub 3498 (Rev. 5-2025) says that if the amount due is less than $100,000 and is paid within 21 calendar days of the bill, no more interest or penalties are charged; at $100,000 or more the period is 10 business days. During the exam a taxpayer can stop interest from running on the amount paid by making an advance payment or an IRC 6603 deposit, though interest continues on interest already accrued.

Where the representative has leverage

Most of the leverage in an exam comes from procedure, not argument. Respond to the opening letter inside 14 days so the case does not drift into no-show procedures. Get the Form 2848 on file before the first appointment so the examiner must schedule with you. Push back on IDRs that are not specific to an issue and period, citing the IRM 4.10.2.10.1 standard. Ask for the mutual commitment date and hold the agent to it. Before the closing conference, ask for the proposed adjustments in writing (Form 5278 or a list) so you can respond to facts before the report is final. And keep track of the statute: an unagreed case with fewer than 365 days left cannot go to Appeals without an extension.

Remember who carries the burden. In Welch v. Helvering, 290 U.S. 111 (1933), the Supreme Court said of the Commissioner's determination: “His ruling has the support of a presumption of correctness, and the petitioner has the burden of proving it to be wrong.” That presumption attaches to the notice of deficiency, which IRM 4.8.9.2 describes as a determination that “is a legal determination that is presumptively correct”. IRC 7491(a)(1) shifts the burden to the IRS on a factual issue in court only if the taxpayer “introduces credible evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer”, and under 7491(a)(2) only if the taxpayer “has complied with the requirements under this title to substantiate any item” and “has maintained all records required under this title and has cooperated with reasonable requests by the Secretary for witnesses, information, documents, meetings, and interviews”. The exam is where that record is made: an IDR answered late or an interview refused is the fact the government will cite to keep the burden on your client. Substantiate as you go, answer every IDR in writing, and document each instance of cooperation.

Questions practitioners ask