## IRS audit defense in Montana IRS audits are stressful but manageable. Most are limited in scope, resolved by mail, and require only documentation. Montana taxpayers also potentially face state tax authority audits with similar (but separate) procedures. ## Audit selection — why you? **Random selection (DIF score):** - Discriminant Index Function score - Statistical model identifies returns to audit - About 1% of returns selected this way **Document matching:** - W-2s, 1099s, 1098s reported to IRS - Don't match what you reported - Automated underreporter (CP-2000 letters) - Most common "audit" **Issue-driven:** - Earned Income Tax Credit (EITC) - Schedule C losses - High-income earners ($1M+) - Specific deductions exceeded norms - Crypto / foreign accounts - Cash businesses **Related parties:** - Audit of partner / employer - Spouse / business partner audited - Whistleblower tip **Industry-targeted:** - Currently focused industries - Tax-shelter participants - Compliance initiatives ## Three audit types **1. Correspondence audit (most common):** - Conducted by mail - Limited specific issues - Provide documentation by mail - Resolved without face-to-face contact - 75%+ of all audits **2. Office audit:** - IRS office - Mid-level scope - Bring documents - Few hours typically - ~15% of audits **3. Field audit:** - Your home / business / accountant's office - Comprehensive scope - Multiple days / weeks - High-income / business returns typically - ~10% of audits ## Statute of limitations **General SOL:** - **3 years** from filing (or due date if later) - IRS must assess additional tax within 3 years - Most audit deadlines **Extended:** - **6 years** if 25%+ income omitted - **6 years** for foreign-asset issues - **No SOL** if fraud / no return filed - **No SOL** for willful tax evasion **SOL extensions:** - IRS may request taxpayer agree to extend - Generally beneficial to refuse (forces IRS to act or close) - Sometimes strategic to extend (gives more time) ## Audit notification **You'll receive a letter:** - Not a phone call (those are scams) - Not an email (those are scams) - Letter on IRS letterhead - Specific issues identified - Documentation requested - Deadline for response **Call IRS to verify** if uncertain — use number from IRS.gov, not from letter. ## Initial response — DON'T panic **Steps:** 1. Read entire letter carefully 2. Note deadline (request extension if needed) 3. Identify specific issues 4. Gather documentation 5. Decide: handle yourself or hire help 6. Consider response timing 7. Document everything **Don't:** - Ignore (silence = agreement to assessment) - Rush response without preparation - Volunteer information beyond what's asked - Lie / cover up - Submit fake documents - Fail to keep copies ## Documentation needed **Common audit issues + documentation:** **Income:** - W-2s, 1099s - Bank statements (deposits) - Customer payments / invoices - Loan vs gift documentation - Inheritance / gift records **Business expenses:** - Receipts (originals or scans) - Bank / credit card statements - Mileage logs (contemporary) - Travel records - Meal / entertainment records **Deductions:** - Mortgage interest (1098) - Property tax payments - Charitable contributions (receipts) - Medical expenses + insurance documentation - State taxes paid **Credits:** - EITC: residency + relationship documentation - Child tax credit: birth certificates, school records - Education credits: 1098-T, payment receipts **Real estate:** - Closing statements - Improvement records - Depreciation records - 1031 exchange documentation **Investments:** - Cost-basis records - Trade confirmations - Brokerage statements - 1099-B reconciliation ## Privileges + protections **Attorney-client privilege:** - Communications with attorney protected - Even from IRS - Strongest privilege **Tax-practitioner privilege (limited):** - CPAs + EAs in civil tax matters - Not in criminal cases - Not in IRS investigations becoming criminal **Work-product doctrine:** - Materials prepared for litigation - Often protects internal analyses **5th Amendment:** - Self-incrimination - Limited application in tax - Available in criminal investigations ## When to hire a representative **Definitely hire CPA / EA / tax attorney for:** - Field audits - Multiple-year audits - Business / Schedule C audits - Foreign asset issues - Significant amounts at stake - Complex transactions - Suspected criminal exposure - IRS Special Agent involvement **Consider hiring for:** - Office audits with substantial issues - Documentation gaps - Discomfort with IRS interaction - Lack of records **Maybe handle yourself:** - Simple correspondence audit - Single issue with clear documentation - Math errors - Document matching ## Power of attorney **Form 2848:** - Authorizes representative - Practitioner can speak with IRS - Can resolve issues without you - Specific years + matters **Often valuable to insulate yourself from direct contact.** ## Audit appeal rights **Disagree with auditor's findings?** **1. Discuss with auditor:** - Present additional documentation - Argue position - Often most efficient **2. Auditor's manager:** - Escalate within audit - Fresh perspective - Often more flexible **3. IRS Office of Appeals:** - Independent review - More flexible than examination - Can compromise / settle - Most appeals resolved here - Right requested in 30-day letter **4. Tax Court:** - File petition in 90 days from 90-day letter - Pay tax NOT required first - De novo trial - Small case option (under $50K) **5. District Court / Federal Claims:** - Pay tax first (refund suit) - Jury trial (district court only) - Limited grounds for choice ## Settlement options **Offer in Compromise (OIC):** - Settle for less than owed - Doubt as to liability - Doubt as to collectibility - Effective tax administration - Form 656 + financials **Installment agreement:** - Pay over time - Various plans (streamlined, etc.) - Interest + penalties continue - Form 9465 **Currently Not Collectible:** - Temporary status - Demonstrate inability to pay - Periodic review **Penalty abatement:** - First-time abatement (FTA) - Reasonable cause - Specific circumstances ## Possible audit outcomes **No change** (~10%): - IRS accepts return as filed - No additional tax **Additional tax (~80%):** - IRS proposes additional tax - Plus interest + penalties - Negotiate or appeal **Refund (~10%):** - IRS finds you overpaid - Refund issued ## Penalties + interest **Common penalties:** - **Accuracy-related** (20% of underpayment) - **Failure-to-file** (5%/month, max 25%) - **Failure-to-pay** (0.5%/month, max 25%) - **Substantial understatement** (20%+) - **Fraud** (75% of underpayment) - **Frivolous return** ($5,000) **Interest:** - Federal short-term rate + 3% - Compounds daily - Cannot be waived (only penalties) ## Criminal vs civil distinction **Civil audit:** - Determine correct tax - Penalties + interest possible - No prison - Most audits **Criminal investigation:** - IRS Criminal Investigation Division - Special Agents involved - Tax evasion / fraud / false statements - 1-5 years prison + fines + restitution - DIFFERENT representation needed (criminal tax attorney) **Red flags suggesting criminal:** - Special Agent contact - Search warrant - Grand jury subpoena - Specific allegations of fraud - Multiple-year, complex investigation **STOP TALKING + GET CRIMINAL TAX ATTORNEY immediately.** ## State audits — separate process ${s.name} state tax authority: - Separate audit from IRS - May follow IRS findings - ${s.name} sales tax / income tax / payroll tax - ${s.name}-specific procedures - Both can audit same year ## What you should do If you receive an IRS audit notice in Montana: don't panic, don't ignore. Read carefully + identify scope. For correspondence audits with clear records, often handle yourself. For complex or business audits, hire CPA / EA / tax attorney. Most Montana tax attorneys + CPAs handle audits — fees range from a few hundred dollars (simple) to $25K+ (complex). Worth it for significant amounts at stake. --- *This guide is general information about federal + Montana tax procedure as of mid-2026 and is not legal or tax advice. Audits are technical + time-sensitive. Talk to a licensed CPA, EA, or tax attorney about your specific situation.*