Quick overview

An IRS field audit (sometimes called an office or in-person audit at your place of business) is one of the most detailed types of IRS examinations. The IRS agent will typically visit your business location to review supporting documents for items reported on one or more tax returns. Proper preparation—especially organized documentation and a designated point of contact—shortens the audit, reduces the chance of adverse adjustments, and lowers stress for owners and staff.

In my 15 years helping small businesses through audits, the cases that resolved fastest were those where the owner had prepared a single, labeled audit file with clear reconciliations between bank deposits, invoices, and tax return lines.

Note: This article is educational and general in nature. For tailored advice about your situation, consult a licensed tax professional or attorney. (See IRS guidance on audits and Form 2848 for representation.)

Why documentation matters (and what the IRS is looking for)

The IRS is verifying three core things:

  • That income you reported matches your underlying records (bank deposits, invoiced sales, merchant reports).
  • That deductions and credits are supported by receipts, contracts, and contemporaneous logs.
  • That payroll taxes and employment filings (Forms 941, W-2, 940) were handled correctly.

If you cannot substantiate an item, the IRS may disallow the deduction or reclassify income, which can increase tax, penalties, and interest. The agency’s “Understanding Audits” page explains the purpose and typical audit steps (IRS, Understanding Audits).

Pre-audit checklist: documents to assemble

Assemble physical or digital copies (PDFs) in a single folder or cloud location. Label documents by year and tax-return line where possible.

Minimum items to gather for the audit period and two prior years (unless the IRS specifies otherwise):

  1. Tax returns and schedules
  • Copies of filed federal and state business tax returns, including any amended returns.
  1. Income documentation
  • Sales invoices, receipts, merchant processor reports (e.g., Stripe, Square), point-of-sale summaries, and deposit slips.
  • 1099s received (1099-NEC, 1099-MISC, etc.) and explanation for any missing 1099s.
  1. Bank and credit card statements
  • All business checking/savings statements and merchant account statements, matched to deposits and expense payments.
  1. General ledger and reconciliations
  • The general ledger and month-end reconciliations tying ledger to bank balances and tax return figures.
  1. Expense support
  • Receipts, invoices, canceled checks, contracts, and credit-card statements that support deductions. For travel, meals, and entertainment, include business purpose, dates, and attendees (see IRS Publication 463).
  1. Payroll & employee records
  • Payroll registers, Forms W-2, Forms 941 and 940, payroll tax deposits, independent contractor agreements, and Form 1099 filings.
  1. Fixed asset schedule & depreciation
  • Purchase invoices, invoices showing dates placed in service, depreciation schedules, and Section 179 elections.
  1. Inventory records (if applicable)
  • Inventory counts, cost methods, purchase invoices, production worksheets.
  1. Contracts & agreements
  • Leases, partnership agreements, client contracts, vendor contracts, loan documents.
  1. Corporate documents (if applicable)
  • Corporate minutes, shareholder agreements, Articles of Incorporation, and bylaws.
  1. Correspondence & prior audit files
  • Any IRS letters, prior audit working papers, notations of prior adjustments.
  1. Books of account and accounting software exports
  • Export reports (PDF/CSV) from QuickBooks, Xero, or your system, along with notes explaining unusual entries or manual journal entries.
  1. Supporting calculations
  • Spreadsheets showing how you calculated deductible items or allocations (e.g., home-office percentage), and a short written explanation of methods used.

How to organize the audit file (practical folder structure)

A consistent folder structure saves hours. Use a single top-level folder named with the taxpayer business name and tax year(s). Inside, use numbered folders that match the checklist above and include an index file (cover sheet) with contact info and a brief summary of the primary issues.

Suggested structure:

  • 01CoverSheetand_Contacts.md
  • 02TaxReturns
  • 03_Income
  • 04BankStatements
  • 05_Expenses
  • 06_Payroll
  • 07FixedAssets
  • 08_Contracts
  • 09_Inventory
  • 10_Correspondence
  • 11ReconciliationsandSupportingCalcs

Add a README.txt in each folder describing what is inside. If sending files to the IRS electronically, convert to searchable PDFs and keep filenames short but descriptive.

Reconciling deposits and income (a common audit focus)

The IRS often starts by matching gross receipts on the return to bank deposits and merchant reports. Follow these steps:

  1. Create a deposit trace worksheet that lists each bank deposit and the source (invoice numbers, daily sales report).
  2. Highlight deposits that represent non-business funds (owner draws, loan proceeds) and document supporting loan agreements or shareholder distributions.
  3. Reconcile merchant processor summaries to the bank statement to show timing differences or chargebacks.

In many audits I’ve handled, a well-documented deposit trace removed the auditor’s primary concern and closed the case quickly.

If records are missing: acceptable substitutes and strategies

Missing documents happen. Reasonable substitutes include:

  • Bank or credit-card records showing the payment.
  • Third-party receipts or vendor invoices.
  • Contracts or schedules with corroborating emails.

If critical source documents are unavailable, prepare a clear, dated explanation of your best reconstruction (who prepared it and the sources used). Explain why originals are missing, provide corroborating evidence where possible, and be candid with the auditor. Excessive or unclear reconstructions often trigger further inquiry, so reconstruction should be a last resort.

Payroll and employment tax specifics

Payroll is a frequent audit area. Provide:

  • Payroll journals and reconciliations to Forms 941 and W-2.
  • Evidence of payroll tax deposits (Electronic Federal Tax Payment System receipts).
  • Worker classification support (contracts, statements of work) if the auditor questions independent contractor vs. employee status.

See our guide on payroll triggers and response strategies for employers for more detail. (Internal link: What Triggers a Payroll Tax Audit and How Employers Should Respond)

Digital records: best practices

  • Keep searchable PDFs. Use OCR so auditors can search key words.
  • Export CSVs from accounting software and include a short explanation of how accounts map to return lines.
  • Retain metadata where possible (downloaded statements show import dates).

IRS guidance on record retention explains how long to keep various records; keep at least three years after filing and longer if you suspect issues (IRS, How Long Should I Keep Records?).

For deeper help on retention policies, see our internal resource: Record Retention Policies That Protect You During Audits.

Working with a tax professional and representation

You can represent yourself, but a CPA, enrolled agent, or tax attorney typically speeds the process and reduces risk. If you want the IRS to deal with your representative, file Form 2848 (Power of Attorney). Our internal guide on using Form 2848 explains practical steps and common pitfalls. (Internal link: Using a Power of Attorney (Form 2848) During an Audit or Appeal)

When choosing representation, pick someone with field-audit experience for your business type. In my practice, an experienced representative can often negotiate scope and limit site disruption.

Timeline, scope, and appeals

  • Most field audits take several weeks to several months depending on document complexity and the auditor’s schedule.
  • The IRS normally has three years from the return’s filing date to assess additional tax, six years for substantial omissions (25%+ of gross income), and indefinitely for fraud (IRS statute of limitations guidance).
  • If you disagree with the auditor’s proposed changes, you can appeal through the IRS Office of Appeals or request a meeting — document the disagreement and the supporting evidence.

See our related pages on Preparing for a Business Office Audit and Tax Audit Appeals for next-step guidance.

Common pitfalls and final tips

  • Don’t volunteer extra unrelated information—answer requests directly and supply the requested docs first.
  • Avoid ad-hoc reconstructions without documenting your method and sources.
  • Keep a log of who provided each document and when; date-stamped files help prevent disputes.
  • If you receive an audit notice, acknowledge it quickly and begin assembling records rather than waiting.

After the audit: close-out and recordkeeping

If adjustments are proposed, you’ll receive a report explaining the changes. Pay attention to deadlines for appeals and for paying any assessed tax. After resolution, update your processes to prevent repeat issues and keep the audit file (and related documents) for the appropriate retention period.

Useful internal resources

Authoritative sources

Professional disclaimer: This information is educational and not legal or tax advice. For guidance tailored to your facts, consult a licensed tax professional.