What survives an IRS examination is the file, not the explanation

What was broken

A professional-services firm was selected for an in-depth review by the tax authority, which questioned expense claims, related-party transactions, and the basis of certain deductions. The owners were concerned about a large addition to income and the penalties that could follow an adverse finding.

What we did

CapEasy assembled the assessment file — reconciling the return with the books, documenting the rationale for each questioned item, and preparing detailed written submissions with supporting evidence. We represented the firm through the assessment proceedings and responded to each query raised by the assessing officer.

Where it landed

The assessment concluded with the proposed additions substantially reduced and the firm’s positions accepted on the strength of the documentation. The engagement also left the client with better-organised records for future filings.

What an IRS examination letter actually asks for

An IRS examination starts the same way every time: a letter, never a phone call. The agency is explicit about this — "Should your account be selected for audit, we will notify you by mail. We won’t initiate an audit by telephone," and any call claiming to open an audit is not the IRS. That first letter carries a written request for specific documents tied to specific lines on the return: income records, the expenses and deductions being questioned, and the schedules behind them. Most examinations run one of two ways — a correspondence audit conducted entirely by mail for narrower issues, or an in-person interview at an IRS office or at the business (a field audit) for the more involved ones.

Selection is not always random. Returns get flagged by a statistical formula that compares them against industry norms, and separately through "related examinations" when a return shares transactions with another taxpayer already under review — a business partner, an investor, a related entity. A related-party transaction on your books is exactly the kind of item that pulls a return into that second bucket, which is why the categories the department in this engagement was already asking about — expense claims, related-party transactions, deduction basis — map directly onto what triggers and drives a US examination.

Substantiation is the whole case

The IRS puts the burden of proof on the taxpayer, not the examiner. Its own guidance is direct: "you generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses," and it is not enough to have a plausible story — you need "sufficient evidence that will support your own statement." A deduction that is real but undocumented and a deduction that is fabricated are treated the same way at the examination table: both get disallowed for want of a file.

Some categories carry a higher bar by design. Travel, entertainment, gifts, and vehicle expenses need "additional evidence" beyond a receipt under the IRS’s own framing — contemporaneous detail on business purpose, not a reconstruction written the week the letter arrived. This is the same discipline the scrutiny assessment tested: the department was not disputing that the firm had expenses, it was asking for the rationale behind each one, in writing, tied to the books. An examiner’s Information Document Request is that same question in US form.

The file a CPA can represent from

Taxpayers have the right to retain a representative for dealings with the IRS, and the right to have objections and additional documentation "considered promptly and fairly" when they disagree with a proposed finding. Both rights only do work if there is a file behind them. A representative arguing from a return that does not reconcile to the books is arguing from the same position CapEasy inherited in the scrutiny assessment before the reconciliation started — and every hour spent rebuilding that base during an active examination is an hour the examiner is not waiting patiently through.

The retention rule underneath all of this is unglamorous but load-bearing: keep the records that support a return until the assessment period for that return runs out — generally three years from filing, longer if unreported income exceeded 25% of gross income shown, or indefinitely if a return was never filed. CapEasy’s part is the file itself — the books kept reconciled to what was actually filed, the supporting schedule behind each deduction, built before an examination rather than reconstructed during one. The return itself, and the representation before the IRS, runs through the partner CPA firms we work with across 15 US states.