Latest / VoraPrep Audio — Professional Licensure & Certification Exam Prep / [EA] SEE3: Mastering the IRS Examination Process: From Selection to Resolution
Transcript
- Hey, welcome to VoraPrep Audio. So, picture this. Your new client walks in, and they look like they’ve just seen a ghost. They slide a letter across your desk. It’s from the IRS. It could be a CP2000 notice, or it could be a full-on examination letter. In that moment, they aren't just paying for your tax knowledge; they're paying for your calm. They're paying for you to navigate what feels like their worst nightmare. This isn't just an abstract concept for the exam. Knowing the IRS examination process cold is a fundamental skill of an Enrolled Agent. It’s about protecting your client, knowing the procedural steps, and getting the best possible outcome. And yeah, it’s all over the SEE exam. So, how does this whole process even start? How does the IRS pick your client out of a hundred million tax returns? Well, they can't look at every single one. It's just not possible. So they use systems to flag the returns that are most likely to have… let's call them 'opportunities for adjustment.' The main tool they use is something called the Discriminant Information Function. Just think of it as a DIF score. It’s basically a secret algorithm that gives every tax return a score. The higher the score, the higher the chance of an audit. It’s kind of like a credit score for your tax return. The formula is top secret, but we know what it looks for: things that are statistically weird. If you're a freelance writer making fifty thousand a year and you claim thirty thousand in travel expenses… the computer is going to flag that. It's an outlier compared to the norms for that profession and income level, so it gets a high DIF score. But that's not the only way a return gets picked. A huge one is simple information matching. The IRS computers are constantly cross-checking. They get a W-2 from your client's employer, a 1099-NEC from their biggest contract gig, a 1099-INT from their bank. Then they look at the tax return. If the numbers don't match up? That’s an almost guaranteed letter. It’s low-hanging fruit for them. Sometimes, an audit of one person can trigger an audit of someone else. Think of it as a domino effect. They're auditing a partnership, so they decide to look at all the partners' individual returns to make sure everything lines up. Or they audit your client’s ex-spouse. And then, sometimes, it’s just random. The IRS has something called the National Research Program, or NRP. They randomly select a batch of returns for a very, very deep-dive audit. We're talking line by line. It’s intense for the person selected, but the IRS uses that data to fine-tune its secret DIF score formula and see where people are making mistakes. A couple of other ways… informant tips. You’d be surprised. A disgruntled ex-employee or an angry ex-spouse might call the IRS. If the tip is credible, that can absolutely lead to an audit. And finally, the IRS sometimes focuses on specific issues or industries. A few years ago, it was all about cryptocurrency. So they might run a project where they pull a bunch of returns that show crypto transactions to see if they're being reported correctly. Okay, so the client is chosen. They're in your office. What do you do? On the exam, every question about this follows a predictable path. You can think of it as a five-step mental checklist. First thing you do, look at the notice itself and identify the *type* of audit. Is it a correspondence audit? That’s the most common. It's all done by mail, usually for a simple issue like a missing 1099. Or is it an office audit? That means you—not your client, you—will be going to an IRS office. This is common for small business owners with Schedule C questions. The most serious is a field audit. That's when a revenue agent comes to the taxpayer's place of business. This is for more complex, high-dollar-value situations. Once you know the type, and before you do anything else—before you even call the revenue agent—you get a Form 2848, Power of Attorney, signed. Immediately. This is your official permission slip to talk to the IRS on your client's behalf. And be careful here: it has to be for the right tax form and the right year. A Power of Attorney for their 2023 income tax doesn't let you talk about their 2024 payroll tax. They're separate. And don't mix it up with Form 8821. That one only lets you *see* information; it doesn't let you represent them. Now you can prepare. But the key is to prepare *responsively*. You answer exactly what the IRS asked for in their Information Document Request, or IDR, and nothing more. If they asked for proof of travel expenses, you give them proof of travel expenses. You don't bring up the home office deduction or anything else. And that leads right into the biggest trap of all: scope creep. This is where an examiner asks a vague, open-ended question, and an unprepared taxpayer or representative just starts talking. They volunteer information. And suddenly, an audit about 2023 travel expenses is now also about 2022 income and a side business the agent didn't even know existed. Think of an audit like a legal deposition. You are the attorney. Your client is the witness. And the witness never, ever talks without you there to filter. You answer only the question that was asked. Finally, you have to know the potential outcomes. The case can be agreed, where you sign a form and it's over. Or it can be unagreed. If it's unagreed, the IRS sends a "30-day letter," which is your ticket to IRS Appeals. If that doesn't work, they send a "90-day letter," which is your ticket to U.S. Tax Court. Missing those deadlines is fatal. Let's walk through an example. Your client is Maria, a sole proprietor consultant. The IRS sends a letter scheduling an office audit for her 2023 Schedule C. They specifically want to look at her fifteen thousand dollars in travel expenses and her eight-thousand-dollar home office deduction. So, what do you do? First, you have Maria sign a Form 2848. You fax it to the IRS and call the examiner to introduce yourself and tell them you’re now the point of contact. Next, you politely ask for a 30-day postponement. You need time. You meet with Maria, go over her records. Her travel logs are pretty good, but there are some gaps. You organize all the good documentation into a binder, and you prepare a solid, reasonable-cause argument for the minor gaps. Then, you go to the audit. Alone. Maria stays home. You hand the examiner *copies* of the organized documents. When she asks about travel, you point to the logs and receipts. You don't talk about anything else. The examiner says, "Well, because of these gaps, I'm going to disallow three thousand dollars." You calmly present your reasonable-cause argument and offer to concede a thousand dollars to settle it. The agent thinks, and agrees to a final disallowance of fifteen hundred. You've just saved your client fifteen hundred dollars in tax, plus penalties and interest. The agent prepares the report and a Form 870, the waiver that closes the case. You review it, explain it to Maria, she signs, and it's done. On an exam question asking what the EA should do first, the answer is always secure the Form 2848 and postpone the meeting. The classic wrong answer, the trap, is "Have Maria attend the audit to explain her records." No. Never. The client does not attend. Here's a simple memory aid for this process. Just remember to PROVE it. P is for Prepare. Get everything organized *before* you talk to anyone at the IRS. R is for Represent. You are the single point of contact. You control the information flow. O is for Objectively Answer. Stick to the facts. Answer only what's asked. Don't speculate. V is for Verify. Provide copies, never originals. And verify the scope of every request. And E is for Escalate. Know the path. If you can't agree with the agent, you know you can ask for their manager, or file a protest and go to Appeals. The number one way these things go sideways is the 'helpful' taxpayer. Or a helpful representative. The client is nervous, they want to explain everything, they start volunteering information. They mention a little side-hustle they have. And boom, the examiner's ears perk up, and the scope of the audit just doubled. Your job is to be the filter. So, what happens at the end? Three possibilities. One, "no change." The agent agrees the return is correct. Two, "agreed." You agree with the changes, sign a Form 870, and that's usually it. Signing that form means you waive your right to go to Tax Court later. Three, "unagreed." You don't agree with the findings. This kicks off a formal process. You'll get what's called a 30-day letter. That letter is your chance to file a protest and go to the IRS Independent Office of Appeals. If Appeals doesn't work out, or you skip it, the IRS issues the big one: the Statutory Notice of Deficiency, also known as the 90-day letter. That is your ticket to Tax Court. You have exactly 90 days to file a petition, or you lose that right forever. For the exam, you absolutely have to know the difference. The 30-day letter gets you to Appeals. The 90-day letter gets you to Tax Court. They will test you on which step comes next. So, to wrap it up: The IRS uses the DIF score to pick returns. Audits come in three main flavors: correspondence, office, and field. Your job as the EA is to be a shield. You control the process, you manage the information, and your client never speaks directly to the examiner in an office or field audit. And if you can't agree, the 30-day letter takes you to Appeals, and the 90-day letter takes you to Tax Court. If you want to run through practice questions on the IRS examination process, and really nail down these steps, check out the full course. VoraPrep is a full exam-prep app — lessons, practice questions, and an AI tutor in one place. You can get started for free at Vora Prep dot com. Alright, that’s all for today. Keep up the great work. You’ve got this.