IRS Correspondence Audits vs. Field Audits: Key Differences and How to Prepare

Correspondence Audits

In a correspondence audit, the IRS sends a letter explaining that the return has been selected for examination and listing the information it wants to see. The taxpayer responds in writing with copies of supporting records. The letter identifies the items under review, such as a particular deduction, credit or income item.

IRS Publication 3498-A, which covers audits by mail, explains the basic procedure:

• If you agree with the proposed changes, you sign the agreement page of the letter and return it.
• If you disagree or plan to appeal, you do not sign; instead, you send documentation and an explanation supporting your position.
• If you cannot meet the deadline, you can call the number on the letter to request more time. The IRS states that it can ordinarily grant a one-time 30-day extension for mail audits.
• If you do not reply by the due date, the IRS will disallow the items identified.

A CP2000 notice is related but different. It proposes changes because income or payments reported by employers, banks or other third parties do not match the return, and it generally asks for a response within 30 days of the notice date.

Office Audits

An office audit is an in-person examination at an IRS office, conducted by a tax compliance officer. Under Treasury Regulation section 301.7605-1, the IRS decides whether an examination will be an office or a field examination based on the complexity of the return. As with any audit, the IRS provides a written request for the specific documents it wants to see.

Field Audits

A field audit is conducted by a revenue agent. Under the same regulation, a field examination generally takes place where the taxpayer’s original books, records and source documents are kept. For a sole proprietorship or business entity, that is usually the principal place of business.

Because the review happens in person, a field audit can cover more ground than a correspondence audit. The Internal Revenue Manual directs examiners to consider gross income in every income tax examination, and its minimum income probes for business returns can include an interview, a tour of the business, a financial status analysis and an analysis of business and personal bank accounts.

The regulation also addresses where the audit happens:

• The IRS will consider, case by case, a written request from the taxpayer or representative to change the place of the examination.
• If holding the examination at the place of business would essentially require the business to close or would unduly disrupt operations, the IRS, upon verification, will move it to an IRS office.
• Wherever the examination takes place, the IRS may visit the business or residence to establish facts that can only be established directly, such as verifying inventory or assets.

Preparing for a Correspondence Audit

Create a folder for each item in the letter and gather the records that support it, such as receipts, invoices, bank and credit card statements, canceled checks and logs. Write a short cover letter that references the notice date and tax year and explains each item. Number the documents and include an index.

Send copies rather than originals, and keep a full set of what you sent along with proof of mailing or upload.

Preparing for an Office or Field Audit

Review the return and the document request before the first meeting and organize records by issue. For a business, it helps to reconcile bank deposits to reported income in advance and to be ready to explain any transfers, loans or other nontaxable deposits, because income is a standard part of the examination.

Answer questions accurately and keep answers to the questions asked. If a question requires records you do not have at hand, it is appropriate to say so and provide the information later.

Representation in Either Type of Audit

A taxpayer can be represented in any audit by a person allowed to practice before the IRS, such as an attorney, a certified public accountant or an enrolled agent, authorized on Form 2848. Under Internal Revenue Code section 7521, a representative with a written power of attorney may represent the taxpayer at an interview, and the IRS generally may not require the taxpayer to attend with the representative unless it issues an administrative summons. If a taxpayer who is acting alone decides during an interview to consult a representative, the IRS will suspend the interview.

The Bottom Line

A correspondence audit is a written exchange focused on the items listed in the letter. Office and field audits are in-person examinations that can be broader, particularly for business returns. In either case, meeting deadlines, organizing records by issue and understanding the procedural rules make the process more manageable.