IRS Audit Process Explained

How an IRS Audit Starts

The IRS selects returns for audit through three main channels: the Discriminant Information Function (DIF) score — a statistical model that flags returns deviating from norms for your income level — random selection, and related examination (when someone you did business with is being audited). Most California taxpayers receive a CP2000 notice or Letter 2205 by mail. You have 30 days to respond. Missing that deadline is the single most costly mistake — it converts a manageable examination into a default assessment.

KDA has represented California taxpayers in over 400 IRS examinations. The first call you make after receiving an IRS notice should be to a licensed Enrolled Agent or CPA — not a tax attorney, and certainly not a tax relief company that charges upfront fees before reviewing your case.

Three Types of IRS Audits

Audit Timeline & Deadlines

The IRS generally has three years from the filing date to audit a return — the standard statute of limitations. That window extends to six years if the IRS believes you underreported income by more than 25%. There is no time limit if the IRS suspects fraud or if you never filed a return. California FTB has its own separate statute of limitations: four years from the filing date for most returns.

Once an audit begins, the IRS will issue an Information Document Request (IDR) listing documents they want. You typically have 30 days to respond. Extensions are available but must be requested proactively — waiting until the deadline passes gives the examiner grounds to make adverse assumptions.

What the IRS Actually Examines

For individual returns, the IRS most commonly examines: Schedule C business income and expenses (especially home office, meals, and vehicle deductions), Schedule E rental income and depreciation, large charitable contributions relative to income, and claimed credits such as the Earned Income Tax Credit or Child Tax Credit. For business returns, the focus shifts to payroll tax compliance, officer compensation, and related-party transactions.

KDA's experience: California taxpayers with Schedule C income over $100,000 face audit rates roughly 3x higher than W-2 employees at the same income level. If you are self-employed, your documentation standards need to be higher — not lower — than what you think is "good enough."

Your Rights During an Audit

The IRS Taxpayer Bill of Rights gives you the right to representation, the right to know why the IRS is asking for information, the right to appeal disagreements, and the right to a final determination before the IRS can take collection action. You are never required to meet with an IRS examiner without representation. KDA's Enrolled Agents can represent you at all levels of the IRS — examination, appeals, and collection — without you ever needing to speak directly to the IRS.

California-Specific Considerations

A federal audit does not automatically trigger a California FTB audit — but the IRS is required to notify the FTB of any federal audit adjustments. The FTB then has two years from that notification to issue its own assessment. KDA always files the required California RAR (Revenue Agent Report) disclosure after any federal audit adjustment to start that two-year clock and prevent the FTB from issuing an unlimited-time assessment.

How KDA Represents You

KDA's audit representation process: (1) Review the notice and identify exactly what the IRS is examining. (2) Gather and organize documentation before any IRS contact. (3) Respond to the IRS on your behalf — you never speak to the examiner directly. (4) Negotiate any proposed adjustments and file an appeal if the examiner's position is incorrect. (5) File California RAR disclosure if federal adjustments are made. Our goal is always to resolve the audit at the examination level without escalating to Tax Court.