Why field audits matter

An IRS field audit is different from a correspondence audit (handled by mail) or an office audit (conducted at an IRS office). Field audits are more invasive: an IRS revenue agent will visit your home, business, or your accountant’s office to review original records, interview owners or staff, and verify the accuracy of returns. Because agents see original documents and can examine business operations, field audits are typically reserved for complex issues, high-dollar adjustments, or suspected fraud (IRS examination guidance: https://www.irs.gov).

In my 15 years advising clients through examinations, the single best protection against a field audit is preparation: accurate returns, consistent records, and a clear explanation linking each deduction to its supporting receipt or contract.

Common triggers for an IRS field audit

The IRS uses a mix of automated filters, third-party data matching, and manual referrals to select returns for examination. While selection algorithms are confidential, common, observable triggers include:

  • High deductions relative to reported income: When business expenses, charitable gifts, or losses are large compared with typical industry ratios, returns often get flagged for closer review. I’ve seen small-business owners whose expense-to-revenue ratios exceeded industry norms trigger in-depth reviews.

  • Information mismatches: Returns that don’t match third-party forms (W-2, 1099, K-1, Form 1098) commonly draw attention. The IRS’s automated matching systems flag discrepancies and can escalate cases to field examinations if the mismatch suggests substantial underreporting (see IRS information reporting: https://www.irs.gov/).

  • Repeated Schedule C losses or hobby vs. business issues: Consistently reporting losses on a sole-proprietor Schedule C may prompt an agent to determine whether the activity is a bona fide business or a hobby (hobby losses are disallowed for tax benefit purposes).

  • Large, out-of-pattern charitable deductions or personal itemized deductions: Donations or medical deductions that are atypical for your income level raise questions about substantiation.

  • Cash-intensive businesses and underreported receipts: Restaurants, salons, and other cash-heavy operations are higher-risk because cash can be underreported. Proper point-of-sale records and bank deposits are crucial.

  • Complex transactions, passthrough income, and basis disputes: High-net-worth taxpayers, partnerships, S-corporations, and owners of rental property are frequently audited when transactions involve basis, distributions, or large losses.

  • Related-party transactions and round-tripping: Non-arm’s-length transactions among family members or related entities can trigger scrutiny if they appear designed to reduce taxable income.

  • Large, unusual adjustments or math errors leading to referral: Often a correspondence adjustment will escalate into a field audit if the taxpayer disputes the change or if the IRS suspects intentional misreporting.

  • Red flags from state tax authorities or whistleblowers: Sometimes state audit referrals or third-party tips cause the IRS to begin a field review.

The exact mix of triggers can change over time as the IRS updates its analytics. For current official guidance on examinations, see IRS publications and the IRS Data Book (https://www.irs.gov/statistics/irs-data-book).

Real-world examples (anonymized)

  • A consultant reported $120,000 in Schedule C expenses against $150,000 in gross receipts. The ratio was far outside peer norms. The agent requested detailed receipts and client contracts; with organized documentation showing legitimate business costs, the audit closed with no change.

  • A small restaurant consistently reported bank deposits noticeably lower than cash register totals in year-end summaries. During a field visit, the agent reconciled daily logs with deposits and proposed additional unreported income. The owner avoided penalties by reconstructing records and cooperating early.

  • A taxpayer claimed unusually large charitable donations relative to income. The absence of contemporaneous acknowledgments and appraisals led to disallowance. The lesson: obtain and keep receipts, acknowledgment letters, and appraisals for noncash gifts.

How a field audit is initiated and what to expect

  • Notification: The IRS begins with a mailed audit notice outlining the scope. Never comply with an on-site visit request without verifying the agent’s identity and the notice details. Genuine IRS field audits start with a written notice—agents do not just show up to demand an immediate search of premises.

  • Identification: If an agent visits, ask for credentials and the audit authorization. You can verify agents through the IRS and request the agent’s supervisor if anything seems off (scams sometimes imitate IRS agents).

  • Scope and timeframe: Field audits can last from several weeks to many months, depending on complexity. Expect formal requests for documents and on-site inspections.

  • Representation: You can—and usually should—have a CPA, enrolled agent (EA), or tax attorney represent you. Granting representation formally via IRS Form 2848 (Power of Attorney) allows your representative to speak and negotiate with agents on your behalf (Form 2848 info: https://www.irs.gov/forms-pubs/about-form-2848).

Step-by-step preparation before and during a field audit

  1. Read the notice carefully and don’t ignore it. Note the deadline to respond and the documents requested.

  2. Contact a qualified professional immediately. In my practice I almost always recommend engaging a CPA or EA experienced with field audits. Representation reduces stress and improves outcomes.

  3. Organize records into a clear audit binder. Include:

  • Tax returns and signed e-file forms for the years in question.
  • Bank statements, deposit slips, POS reports, and reconciliations.
  • Receipts, invoices, contracts, canceled checks, and vendor statements.
  • Mileage logs, appointment books, and calendars that support business use.
  • For noncash charitable donations: contemporaneous written acknowledgments and appraisals for items over $5,000.

  1. Reconcile third-party forms with reported income. If you received incorrect 1099s or W-2s, obtain corrected forms (1099- corrected or W-2c) and include correspondence showing attempts to correct errors.

  2. Prepare a written, concise explanation for significant items. Agents appreciate short narratives that connect a deduction to its business purpose.

  3. Limit voluntary, unnecessary disclosure. Answer the specific request but avoid offering additional issues that could broaden the audit’s scope.

  4. Keep copies of every document sent to the IRS and maintain a dated correspondence log.

  5. If the IRS agent requests an extensive on-site review, set clear boundaries: define the workspace, request time to assemble documents, and consider having your representative present.

  6. Negotiate wisely. If the agent proposes adjustments you disagree with, provide supporting documentation first. If an agreement is not possible, your representative can request a conference with the IRS Appeals Office (see IRS appeals: https://www.irs.gov/advocate/appeals).

  7. Understand penalties and interest. Accurate documentation can reduce or eliminate penalties. Penalties for negligence, substantial understatement (20%), or fraud (up to 75%) depend on facts and agent findings.

Practical recordkeeping tips to lower audit risk

  • Keep organized, contemporaneous records: digital copies (scanned receipts with date and annotation) plus original files when relevant.
  • Reconcile bank accounts monthly and maintain a clear audit trail linking income lines to deposit dates and invoices.
  • Use business bank accounts and payroll for owners/staff to avoid commingling personal and business funds.
  • Maintain reasonable home-office and mileage logs if claiming business-use deductions; IRS expects regular records.
  • For high-value charitable or noncash gifts, get written acknowledgments and qualified appraisals.

If you receive a field audit notice: immediate checklist

  • Verify the notice and agent credentials.
  • Contact your CPA/EA/tax attorney and consider filing Form 2848 to authorize representation.
  • Gather requested documents and prepare a concise explanation for each contested item.
  • Do not sign proposed changes without understanding long-term consequences—ask for time to consult counsel.

Possible outcomes and next steps

An audit can end several ways: no change, agreed adjustment (taxes, interest, penalties), or proposed deficiency leading to appeals. If you disagree, you may pursue the IRS Appeals Office and, if needed, take the case to U.S. Tax Court. Keep in mind statutory appeal rights and time limits described in IRS notices.

Internal resources

For practical checklists and preparation guides on related audit types, see these FinHelp resources:

These pages provide downloadable checklists and sample audit binders I frequently use with clients.

Final practical tips from my practice

  • Be proactive: don’t wait until an audit to get your books in order.
  • Use a professional for complex returns: a well-prepared return reduces confusion and questions.
  • Treat agents respectfully and cooperate—but use representation for technical negotiations.
  • Maintain a single, consistent method for reporting income and expenses year to year; abrupt changes should be documented and explained.

Disclaimer and sources

This article is educational and does not replace personalized tax advice. Consult a qualified tax professional about your specific situation. For official IRS guidance on audits and examinations, see the IRS website and publications, including IRS Publication 556 and the IRS Data Book (https://www.irs.gov). Additional authoritative resources include the Taxpayer Advocate Service and IRS forms page.

Author: CPA and financial planner with 15+ years’ experience advising taxpayers through audits and examinations.