How to Prepare for a Tax Audit

The notice from the IRS has arrived, and it can stop even the most seasoned financial professional in their tracks. While an audit isn't a confirmation of wrongdoing, it requires a methodical, organized, and proactive response. This guide breaks down exactly how to prepare for a tax audit, turning a potentially stressful experience into a manageable process. We will cover the immediate first steps, the documentation and review process, and how to manage the audit meeting itself.

Don't Panic: Your First 48 Hours

The moment the audit notice, officially known as Letter 2205-A or a similar form, lands on your desk is when the clock starts ticking. Your initial actions set the tone for the entire engagement. Panic leads to mistakes; a clear plan builds a strong foundation.

1. Read the Notice Carefully

Before you do anything else, thoroughly read the entire notice from top to bottom. Not all audits are the same. You need to identify key pieces of information:

• Type of Audit: Is it a correspondence audit (handled by mail), an office audit (at an IRS office), or a field audit (at your client's place of business)? This dictates the entire logistics of the process.
• Tax Year(s) in Question: Confirm exactly which tax years are under review. Your scope of work is limited to these periods.
• Specific Information Requested: The notice will often list the specific parts of the return being examined, such as travel and entertainment expenses, cost of goods sold, or rental property deductions. Sometimes it's a general review, but often it's targeted. This is your initial roadmap.
• Auditor Contact Information: Note the name, title, and contact details of the assigned Revenue Agent. All future communication will be directed to this person.
• Response Deadline: This is the most important date on the document. Immediately calendar it and work backward to set your internal deadlines.

2. Inform Your Client and Assemble Your Team

Contact your client immediately. Explain the situation calmly and professionally, laying out the process and what you'll need from them. Establish that you will be their primary point of contact with the IRS, which is critical for controlling the flow of information. If necessary, engage a tax attorney, especially if the audit shows signs of becoming contentious or involves complex legal interpretations.

3. Place a Preservation Hold on All Relevant Documents

Issue a formal, written notice to your client to immediately cease any routine document destruction policies related to the tax years under audit. This includes emails, electronic files, receipts, bank statements, logs, and any other data that could possibly be relevant. Losing documentation, even accidentally, can be difficult to defend during an audit.

Scoping the Audit and Gathering Documentation

With the initial steps handled, you can move into the discovery and organization phase. The goal here is to be over-prepared, creating a complete and easily accessible file that mirrors the auditor's request list, officially called an Information Document Request (IDR).

1. Understand and Limit the Scope

Your work should be confined only to the items and years listed in the IRS notice. Auditors are trained to ask open-ended questions that might lead them to examine other areas or years. Sticking to the initial scope is your primary defense against a "scope creep" that expands the audit. You are not obligated to provide information outside of what was formally requested.

2. Create a Master Document Checklist

Translate the IDR or initial notice into a detailed checklist. Don't just list "Expense Receipts"; break it down into the specific categories requested (e.g., "Meals," "Travel Flights," "Office Supplies"). Common requests include:

• Income Verification: Bank statements, deposit slips, merchant processing reports (like Stripe or Square), invoices, and Forms 1099.
• Expense Substantiation: Canceled checks, credit card statements, vendor invoices, and detailed receipts. For large expenses, you will need all of these items.
• Asset and Capital Purchases: Purchase agreements, settlement statements, and invoices for equipment, vehicles, or property. This documentation supports your depreciation schedules.
• Logbooks: For business use of a vehicle or certain travel expenses, a contemporaneous mileage or travel log is essential.
• Balance Sheet Accounts: Documents supporting loans, major liabilities, and equity transactions will often be requested.

3. Organize Everything Methodically

Do not hand the auditor a shoebox full of receipts. Your organization signals your professionalism and makes the review process smoother. Create a binder or secure digital folder with dividers for each item on the IDR. For every document, ensure it is clear, legible, and directly ties back to an item on the tax return. If you use accounting software like QuickBooks Online or Xero, run reports like the General Ledger or Transaction Detail by Account to serve as a guide for your document gathering.

The Pre-Audit Review: Building Your Case

Once you've gathered all the documents, the real work begins. This is where you shift from an administrator to a strategist. You are essentially conducting your own mini-audit to anticipate the Revenue Agent's questions and build your case for every position taken on the return.

1. Trace Every Line Item to Its Source

Go line by line through the tax return areas under audit. It's imperative that you personally trace each figure back to the source documents you have collected. For example, if "Repairs and Maintenance" is $15,000, you need an adding machine tape or a spreadsheet that lists every single invoice totaling that exact amount. This verifies both the total and the classification of each underlying transaction.

2. Identify Potential Weak Spots and Address Them

Be honest with yourself and your client. Are there any positions on the return that are aggressive? Is any documentation missing or incomplete? For example, perhaps a restaurant receipt is missing, or the justification for classifying a worker as a contractor instead of an employee is thin. You must identify these areas before the audit. Not having an answer is much worse than having an explanation prepared for a weak position. For these gray areas, you must do your homework.

3. Substantiate Positions with Authoritative Support

This is where your professional expertise is most valuable. If you claimed a substantial Section 179 deduction or took advantage of research and development credits, you need more than just receipts. You need to be prepared to defend the technical tax position itself. This means reviewing the Internal Revenue Code (IRC), Treasury Regulations, and relevant Revenue Rulings or court cases that support your client's position. Having the specific citation for why a deduction is allowable shows the auditor you are prepared and understand the law.

Managing the Audit Itself: Communication and Conduct

How you communicate and conduct yourself during the audit meetings can significantly affect the outcome. Your role is to be a professional, dispassionate buffer between your client and the IRS.

1. Designate a Single Point of Contact

You, the tax professional, should be the sole point of contact. Instruct your client not to speak directly with the auditor unless you are present and have prepped them. This prevents them from accidentally volunteering information or making statements that could complicate the audit.

2. Answer Only the Question Asked

This is rule number one for audit conduct. Listen carefully to the auditor's question. Provide the information or document they requested, and then stop talking. Do not speculate, do not offer explanations unless asked, and do not volunteer any information that was not explicitly requested. Polite, concise, and direct answers are best.

3. Keep Meticulous Records

Keep a log of all interactions. Note the date and time of every meeting, call, or email. Document every question asked by the auditor and record exactly what information or documents you provided in response. After each meeting, send the agent a brief email summarizing your understanding of the requests and next steps to ensure everyone is on the same page.

4. Maintain Professionalism at All Times

Audits can be frustrating, especially if you believe the agent is being unreasonable. However, maintaining a professional and cooperative demeanor is always the best strategy. Be firm in defending your client's positions but avoid becoming adversarial. A calm, organized approach builds credibility and often leads to a more efficient and favorable resolution.

Final Thoughts

A successful tax audit is not dependent on luck, but on a structured process of preparation, careful documentation, and strategic analysis. By taking control from the moment the notice arrives, you protect your client and demonstrate the highest level of professional diligence in defending your work.

The time spent researching tax law to substantiate a client's position is one of the most important parts of this process, but it can also be the most time-consuming. Instead of manually searching through thousands of pages of tax code and rulings, you can ask a question in plain English and get an immediate citation-backed answer. When the auditor asks "where in the code does it say that," we help you have the answer ready in seconds directly from the governing Internal Revenue Code, IRS notices, and Treasury Regulations with Feather AI.