IRS Audit Defense

How it works

Audit defense is not a deduction. It is procedure, and the goal is narrow: sustain the positions already taken on the return at the lowest possible cost and exposure, while keeping every downstream right, an administrative appeal, a Tax Court petition, alive for as long as it might be needed.

An exam is an evidentiary contest before it is anything else. The Commissioner's determination of a deficiency is presumed correct, a rule the Supreme Court set out in Welch v. Helvering and one that has never moved. That presumption means the number on the notice starts as the IRS's number, and the taxpayer carries the initial burden of proving it wrong, not the other way around.

Winning turns on two things working together. The first is documentation quality: whether the record clears the general recordkeeping standard of Section 6001, or the stricter four-part standard Section 274(d) imposes on travel, gifts, and listed property. The second is procedural posture: whether the practitioner cooperated enough, on the record, to shift the burden of proof to the IRS under Section 7491 and to preserve every appeal deadline along the way. A client can have a fully defensible return and still lose ground on the second half alone.

What this is worth in Florida

Purely federal, on the individual side. Florida has no individual income tax, so an exam of a personal Form 1040 is a federal proceeding from the first letter to the last. Where Florida shows up is on the entity side, and it runs on entirely separate tracks: Florida corporate income tax exams for C corporations, Florida reemployment tax audits, and Department of Revenue sales and use tax audits. None of those follow the federal burden-of-proof rules described here, and none of them are what this page covers.

Who this applies to

The procedure applies to any taxpayer under a federal examination, and the sensible first move for almost anyone in that position is filing Form 2848, the Power of Attorney, so contact runs through a practitioner rather than through direct interviews with the examiner. The representative doing that work matters quite a bit, and I go through what to weigh in my guide to choosing an accountant. Beyond that starting point, the specific defensive tools below are not universal. Each one has its own gate.

• Cohan estimation is available to a taxpayer who can show an expense was genuinely incurred but cannot prove the exact amount. It does not rescue an expense that was never incurred at all, and the court that created the rule was explicit that inexactitude "bears heavily" against the taxpayer whose own conduct created the uncertainty.
• The burden-of-proof shift to the IRS under Section 7491(a) is available to any taxpayer, individual or entity, who introduces credible evidence on the factual issue, has substantiated the item, kept the required records, and cooperated with reasonable IRS requests. A partnership, corporation, or trust faces one more gate that an individual does not: a net-worth ceiling at filing, imported by cross-reference to Section 7430(c)(4)(A)(ii). That ceiling is not one number. A partnership or corporation qualifies only under a $7,000,000 ceiling, while a trust is held to the lower $2,000,000 ceiling that otherwise measures an individual. A qualified revocable trust is exempted from the gate entirely for a window tied to the decedent's death.
• The penalty burden of production under Section 7491(c) sits on the IRS for any individual, across all of these categories, without a separate qualification test of its own.

What this means in practice is that an individual answering an audit is never blocked from the burden shift by net worth, only by the quality of the record and the cooperation behind it. A partnership or corporation can do everything right on the facts and still sit outside the net-worth gate that applies only to entities.

What it requires

The standard scales with the issue. For an ordinary business expense, Section 6001 asks for "such records" as the Secretary prescribes, which in practice means books, invoices, and bank or credit records that corroborate the item. If the amount is uncertain but the expense is clearly proven, that is exactly the gap Cohan estimation exists to fill.

Travel (including meals and lodging away from home), gifts, and listed property such as vehicles sit under a stricter rule entirely. Section 274(d) requires adequate records or sufficient corroborating evidence establishing four separate elements: the amount, the time and place (or the date and description, for a gift), the business purpose, and the business relationship of the person who received the benefit. Missing any one of the four is treated as missing all of them. Contemporaneous logs, calendars, and receipts meet this standard. Logs assembled after the return is already under exam routinely do not.

Cooperation is a requirement in its own right, not a courtesy. An Information Document Request, IRS Form 4564, is the examiner's formal records demand, and there is no single statutory deadline attached to it. Most are set around 30 days, and the examiner is expected to negotiate a workable date rather than impose one. What the record needs to show is a complete log: every IDR received, every item produced, and the date each one moved, because that log is itself the evidence that later supports a Section 7491(a) cooperation argument. If the underlying books were never kept current in the first place, the record an examiner would see does not exist yet, and getting there is its own project, one I cover in my guide to catch-up bookkeeping. Silence on an IDR has a specific cost of its own: an unanswered request can escalate to a summons under Section 7602, enforceable in district court, and it independently forfeits the cooperation prong the burden shift depends on.

Two clocks run on fixed schedules once the exam produces a written result, and neither one bends for a busy season. A 30-day letter proposing adjustments carries 30 days to file a written protest with the IRS Independent Office of Appeals, the cheapest and fastest way to keep a case out of court entirely. A Statutory Notice of Deficiency under Section 6212, the 90-day letter, carries 90 days (150 if it is addressed outside the United States) to petition the Tax Court under Section 6213(a). That second deadline is jurisdictional. Missing it does not just cost an opportunity; it closes the prepayment forum completely, and the only route left afterward is paying the tax and suing for a refund under Section 7422.

What you need to document

Corroboration for a general expense

Books, invoices, and bank or credit records tying the item to a real transaction with an identifiable vendor. This is what Section 6001 asks for on its own, and it is also what turns a bare assertion into an expense a court will agree was actually incurred, which is the predicate Cohan estimation requires before it can help at all.

The four Section 274(d) elements, contemporaneously

Amount, time and place (or date and description for a gift), business purpose, and the business relationship of the recipient, recorded as the activity happens rather than reconstructed later. A mileage log, a calendar entry, and a receipt kept at the time carry real weight. The identical facts written down after the exam notice arrives generally do not.

A complete Information Document Request log

Every IDR received, every item produced in response, and the date of each exchange. This is the record that later stands in for "cooperated with reasonable requests" when the Section 7491(a)(2)(B) cooperation prong is actually tested.

The engagement paperwork

Form 2848 on file before the practitioner makes first contact with the examiner, so every subsequent interaction is routed through representation rather than a direct interview.

Where it goes wrong

None of this is exotic law, which is part of why the failure modes are so consistent from one exam to the next. They are procedural and evidentiary, not legal theory.

The recurring mistakes

• A reconstructed 274(d) log. Mileage and travel records assembled after the return is already under exam are routinely rejected, because the statute demands contemporaneous records or evidence corroborating all four elements, not a plausible after-the-fact narrative.
• Treating Cohan as a universal fix. It rescues an inexact but proven general expense. It does not touch a Section 274(d) category at all, and a practitioner who leans on Cohan for auto, travel, or meals loses the entire bucket rather than a discounted piece of it.
• Over-producing on an IDR. Handing an examiner more than what was requested tends to open new issues rather than close the existing one, and it lengthens the exam it was meant to shorten.
• Forfeiting the burden shift through sloppy cooperation. Incomplete records or a stonewalled IDR defeats the Section 7491(a)(2)(B) cooperation prong on its own, and the burden of proof simply stays where it started, on the taxpayer.
• Conceding an accuracy-related penalty by reflex. Section 7491(c) puts the burden of production for the Section 6662 penalty on the IRS, and reasonable cause, including reasonable reliance on a preparer, is a live defense that does not have to be surrendered before the IRS has met its own burden first.

The clock that ends the case

Every other mistake on this list is recoverable in some form. This one is not.

The 90-day Statutory Notice of Deficiency deadline under Section 6213(a) is jurisdictional. If a Tax Court petition is not filed within 90 days, 150 if the notice went to an address outside the United States, the prepayment forum is gone permanently. There is no extension and no reasonable-cause exception that revives it.

Calendar the date on the notice itself the day it arrives. It is the single most consequential date in the file, and staying ahead of it is entirely within a practitioner's control.

A situation where this comes up

The pattern I see most often under exam is a Schedule C return with two very different piles of support behind it. One pile is supplies, contract labor, and software, backed by invoices for most of it and by bank debits with an identifiable vendor for the rest. The other pile is a vehicle and some travel, backed by nothing more than bank charges and a calendar, with no mileage log behind either one.

Those two piles do not end the same way, and the difference has nothing to do with how much was actually spent or how legitimate the underlying business activity was. The first pile mostly survives. What is fully documented is fully allowed under Section 6001, and the portion that is proven but not exactly documented gets a Cohan estimate rather than a flat denial. The second pile does not survive at all, because Section 274(d) has no estimate to offer. Without a log establishing the four elements, the entire vehicle and travel category is disallowed, in full, regardless of how plausible the spending looks on the bank statement.

The frustrating part, and the part worth saying plainly, is that the second pile was avoidable from the start. A mileage log costs nothing and takes a few seconds per trip. Once the return is already under exam, no amount of good-faith reconstruction earns back what a log kept in real time would have preserved automatically. Of everything in this procedure, that habit is the highest-leverage one, because it is the only piece of substantiation a taxpayer fully controls before an exam ever starts.

The version of this that works well is the client who calls before anything is due, not after a notice arrives: representation goes on file, the IDR gets answered on schedule and no wider than asked, and the record for the categories that need one exists already because it was built across the year rather than assembled the week before a deadline. A closed exam is not always the last word either. If a fact surfaces afterward that changes the return, amending it is a separate mechanism, one I cover in my amended returns piece, and it runs on its own rules rather than the ones described here.