Responding to an IRS Examination: Building Your Case File

Overview

An IRS examination (audit) is a focused review of specific items on one or more tax returns. The examiner’s notice will identify what is under review — for example, a Schedule C business loss, a home office deduction, or itemized deductions. Your case file’s job is to connect the IRS’s question to clear, verifiable evidence and a short explanation that lets the examiner verify your position without hunting for missing pieces.

In my practice helping clients through examinations for more than 15 years, the cases that close quickly are the ones with concise, well-indexed files that pair documents with a simple explanation. The IRS encourages cooperation and documentation (see “What to expect if you’re selected for an IRS examination” at the IRS website) (https://www.irs.gov/newsroom/what-to-expect-if-youre-selected-for-an-irs-examination).

First actions after you receive the notice

1. Read the notice carefully. Note which tax year(s), what items are questioned, and the deadline for your response.
2. Don’t sign anything or agree to proposed adjustments without understanding them.
3. Note the contact person and the return address or fax/email instructions — respond to the address shown on the notice.
4. Consider notifying your tax preparer, CPA, or enrolled agent immediately. You may authorize a representative using IRS Form 2848 (Power of Attorney) if you want someone else to speak on your behalf (https://www.irs.gov/forms-pubs/about-form-2848).

What to include in your case file

Create a file that mirrors the IRS’s questions. For each disputed item include:

• A concise cover letter or index that references the IRS notice line/item.
• The originally filed tax return and any amended returns for the year(s) under review.
• Copies of primary source documents: receipts, invoices, canceled checks, merchant statements, bank statements, payroll records, Forms 1099, Forms W-2, and client contracts.
• Reconciliations tying totals on the return to source documents (for example, a Schedule C gross receipts subtotal reconciled to bank deposits and customer invoices).
• A one-page explanatory memo for each issue (see “How to write the memo” below).
• An exhibit list (numbered exhibits) and a table of contents for quick navigation.
• Correspondence with third parties or your own written notes explaining business practices or unusual transactions.
• Any prior years’ returns or documentation that provide context if the issue spans multiple years.

If the examiner requested specific documents, assemble those first and highlight them in your exhibit list. Always keep originals or certified copies; provide clear copies to the IRS and retain the originals in your file.

Organizing the physical or digital file

Choose a system that is consistent and easy to follow:

• Use a table of contents and number every exhibit (Exhibit 1, Exhibit 2, etc.).
• For digital files, create a top-level folder like “IRS Audit YYYY” and subfolders named with the exhibit number and short description (e.g., 01Return, 02BankStatements). Use PDF format for scanned documents and enable searchable OCR when possible.
• For paper files, use a three-ring binder, tabbed dividers, and a printed index. If you provide paper to the IRS, staple or binder-clip exhibits and include a copy of the index.
• Label every page with a header that includes the exhibit number and taxpayer name or EIN — this helps when documents are separated or scanned.

Writing concise explanatory memos

Each disputed item should have a one-page memo that includes:

• The issue and the return line number in plain language.
• A short summary of facts and the law or business practice that supports your position.
• Cross-references to exhibits (e.g., “See Exhibit 5: Customer invoices Jan–Dec 2023”).
• Any calculations or reconciliations used to arrive at the numbers.

Examiners review many files; a direct memo that answers the question quickly increases your chance of a favorable result.

Reconciliations and supporting schedules

Don’t deliver raw documents without showing how they tie to the tax return. Common reconciliations include:

• Bank deposit summaries tied to gross receipts on Schedule C.
• Trial balances and general ledger extracts that match reported income and expenses.
• Mileage logs summarized into a total with dates and business purpose.
• Cost-basis worksheets for asset disposals and depreciation schedules.

If you use accounting software, export clean financial statements and add a short note showing which software report lines map to the return.

Handling missing or incomplete records

If originals are missing, provide substitute documentation: bank statements, credit-card statements, invoices, third-party confirmations, and affidavits or sworn statements explaining why originals are unavailable. The IRS accepts substitute evidence when primary evidence is unavailable if the substitute is credible and complete.

Avoid fabricating records. If a transaction cannot be fully documented, be candid and explain the reasonable basis for your position and the steps you took to reconstruct records.

Communications and delivery

• Always send a cover letter and an exhibit list when you submit documents. State clearly which issues you are responding to and which exhibits correspond to which issues.
• Keep copies of everything you send and note the delivery method and date (certified mail, tracked courier, e-filing portal, or fax header showing transmission).
• If you need more time, contact the examiner promptly and request an extension in writing — document the call and follow up with an email or letter.

Preparing for an in-person interview or field audit

• Bring a clean, organized binder with a printed index and exhibit tabs.
• Bring the person who prepared the return or a knowledgeable representative; the IRS accepts representatives designated on Form 2848.
• Prepare a short script of the facts and rehearse responses to common questions. Stick to facts; avoid volunteering extra information.

For field audits, the IRS may request access to your books at your place of business or the IRS office. Understand your rights under the Taxpayer Bill of Rights (https://www.irs.gov/taxpayer-bill-of-rights) and discuss any concerns with your advisor.

Common mistakes to avoid

• Sending disorganized records without an index.
• Failing to reconcile documents to the return figures.
• Missing deadlines or failing to request extensions.
• Admitting mistakes without consulting a tax professional — an acknowledgment can be used to propose adjustments.
• Giving the IRS originals that you cannot replace; keep originals when possible and provide copies.

When to hire a professional

Hire a CPA, enrolled agent (EA), or tax attorney if:

• The proposed adjustment is large or involves complex tax law (e.g., related-party transactions, basis issues, employment taxes).
• You are uncomfortable communicating directly with the IRS.
• The examination could lead to potential penalties or criminal exposure.

A professional can prepare the case file, represent you at meetings, and, if necessary, negotiate an appeals route. If you plan to appoint a representative, use Form 2848 to document the authorization (https://www.irs.gov/forms-pubs/about-form-2848).

After the audit: closing the file and record retention

If the examiner accepts your position, get the agreement in writing. If there’s an adjustment, make sure you understand how the IRS calculated the change and whether penalties or interest apply. You have appeal rights; see the IRS appeals process for timelines and steps (https://www.irs.gov/appeals).

Maintain the audit file and supporting records for at least seven years for items that led to adjustments, and follow your tax advisor’s guidance for retention periods.

Practical templates and further reading

• For a practical approach to organizing evidence, see our guide on Preparing a Professional Audit File: Organize Your Records Like a Pro.
• If your examination is a correspondence audit, our checklist and sample response letter will help you respond efficiently: Preparing for a Correspondence Audit: Document Checklist and Sample Response Letter.
• For individuals facing a field audit, review the Evidence Checklist for an IRS Field Audit of Individuals to ensure you haven’t missed common items.

Final notes and disclaimer

This article summarizes common best practices for responding to an IRS examination and building a case file. It is educational and not a substitute for personalized legal or tax advice. If the audit raises complex legal or tax exposure, consult a credentialed tax professional or attorney experienced in IRS examinations.

Author’s note: In my years of practice I’ve seen well-documented cases close faster and with fewer penalties. Preparing your file the way described here saves time, reduces stress, and improves outcomes.

Authoritative sources: IRS — What to Expect if You’re Selected for an IRS Examination (https://www.irs.gov/newsroom/what-to-expect-if-youre-selected-for-an-irs-examination); IRS — About Form 2848 (https://www.irs.gov/forms-pubs/about-form-2848); IRS — Taxpayer Bill of Rights (https://www.irs.gov/taxpayer-bill-of-rights).