Few things are as nerve-wracking as receiving an IRS audit notice—but how do audits really work, and what can you do to protect yourself? In this episode of Absolute Trust Talk, Kirsten Howe sits down with Anthony Kim, a former IRS Chief Counsel Attorney with 26+ years of experience, to reveal the truth behind IRS audits. Tony, who has litigated complex tax cases for the U.S. Treasury Department and represented Fortune 500 companies and high-net-worth individuals at Ernst & Young, shares insider knowledge on what triggers audits, the IRS selection process, and how to avoid common red flags. You’ll learn why IRS audits are rarer than you think, the top mistakes taxpayers make, and why choosing the right representative—CPA or tax attorney?—could make or break your case. Plus, Tony drops a little-known IRS tip that could save you from missed notices and financial headaches. Don’t leave your financial future to chance! Listen now to get expert advice on navigating an IRS audit with confidence.
Time-stamped Show Notes:
0:00 Introduction
0:57 Meet Anthony Kim: Former IRS Chief Counsel Attorney & tax expert
3:42 What triggers an IRS audit? Common red flags explained.
6:28 Whistleblower reports and third-party mismatches—how they lead to audits
7:46 The truth about audit risk: How rare are they, really?
8:43 Step one: How the IRS contacts you—don’t fall for scams!
10:00 The one IRS form every taxpayer should file after moving
11:00 The biggest mistake taxpayers make—what NOT to say in an audit
15:32 The worst-case audit scenarios and how to avoid them
16:49 Why even a low-risk audit could turn into a criminal case
17:24 Who should represent you in an audit? CPA vs. tax attorney debate
21:38 What happens at the end of an audit—how decisions are made
22:47 How to challenge an IRS audit decision and file a protest letter
Transcript:
Hello and welcome to Absolute Trust Talk. I’m Kirsten, the managing attorney at Absolute Trust Counsel, and this is our podcast here at Absolute Trust Counsel.
Today, I have guests, and we’re going to talk about the one phrase in American English that is more terrifying than almost any other: “IRS audit.” I will admit that I have, personally, some sort of Scooby-Doo-based vision of what happens in an IRS audit. In my mind, the IRS sends a team of agents to your office, camps out there for a few weeks, they goes through every drawer and every file until it finds that one thing you forgot to save the receipt for, and then it takes you to jail.
I’m pretty sure that’s not exactly how it goes, but I hesitate to say this out loud almost because I don’t want to jinx myself. I have never been audited by the IRS, so I really don’t know what happens. But I want to know, and I want you, the listener, to know, too. So, I have invited my esteemed colleague, Tony Kim, here to talk about IRS audits.
Anthony Kim is a founder of the law firm Kim and Rosato. He specializes in assisting clients with federal and state tax matters. He worked for over 26 years as an attorney with the Office of Chief Counsel, Internal Revenue Service, as a legal advisor, and has litigated some of the most complex tax issues for the U.S. Treasury Department. In addition to his government background, Tony worked in the private sector as an Executive Director of Tax Controversy and Risk Management for Ernst & Young. In this role, he led their Pacific Northwest Controversy Practice, helping clients address a wide range of IRS compliance issues. He represented Fortune 500 companies and high-net-worth individuals in that capacity, representing them before the IRS.
Just so you don’t think he’s nothing but a tax nerd, he also has served as an adjunct professor at St. Mary’s College, where he trains students to become qualified to serve as volunteers at local nonprofit organizations in order to assist low-income people and families with their taxes. Tony, welcome. So great to have you here. Thank you. It’s a pleasure to join you.
Now, when you worked for the IRS, the United States government was your client, and you went up against taxpayers. Now that you are back in the private sector, your clients are individuals and businesses dealing with the IRS, so you’re going back up against the IRS. For those of you who aren’t lawyers, you just can’t even imagine how valuable it must be to have the attorney representing you be someone who knows exactly what’s going on the other side because they lived that life for 26 years. That’s incredibly valuable.
Let’s start. We’re here to talk about audits. What triggers an audit? What causes the IRS to start an audit?
First, I think if I were listening, I’d say, “Well, what are the chances of an audit?” It’s very rare. If you go on the web and type in “Internal Revenue Service statistics,” you’ll get a link that has historical data on audit risk. It breaks it down by year and by category, such as if you’re a partnership or a corporation or an individual. Then it breaks it down even further if you’re an individual, segmenting it by your income level. If you look at your income level, you can see directly what your percentage of audit is, and it’s very low. It’s maybe under 2% risk for most individual levels of income. Of course, the higher your income goes, the higher your risk. But overall, the risk of audit for an individual is very low. That’s just the statistics.
That should be comforting to a lot of people because an audit is very, very intrusive and very stressful. So, back to the question of what causes an audit—there could be various factors, the main one being what’s called a Discriminate Function score (a DIF score). There are various elements—variables—that go into this DIF score that would prompt an audit. I don’t know exactly what goes into it (that’s not published by the IRS), but it’s a random number. Based on certain criteria, the DIF score will pop out certain individuals or entities that will then be selected for audit.
Separately, there could be a manual survey of returns. When I worked for a certain division called the Global High Wealth Division, it focused on very high-wealth individuals. They would actually pull certain individual returns from that population of very high-wealth individuals and just survey them, physically look at them, and say, “Let’s look at this and that.” If they saw certain things from their survey of returns that piqued their interest, they might then manually select those returns for audit.
Then there’s whistleblower. Someone might say, “I have information. I personally know that this person or this entity has been doing something contrary to law.” They would write a summary and send it to the IRS. Now, the IRS doesn’t have to guess whether a return should be audited; they have specific information. So the IRS may take action on a whistleblower submission.
The easiest one is a discrepancy between what a taxpayer prepares and reports on a return versus what a third party reports. An example would be missing a 1099. Sometimes, that’s an innocent thing—you think you reported everything, but you forgot one. It could be $700 that Wells Fargo reported on a 1099, saying, “You received this dividend or income in 2024,” but you didn’t report it. There’s a mismatch. That could trigger what’s called a correspondence audit. That’s not deep enough to create a huge audit. It’s just a letter from the IRS saying, “We see this discrepancy. Can you explain it?” Then you respond, and that’s the end of it.
There are various inputs that could cause an audit, but overall, despite all these sources, the percentage is very low. Right now, we’re in February 2025. Listeners have probably heard and seen on the news that there is a serious downsizing of the federal government, including the IRS. So, even with the historically low number of audits, I suspect that for the next four years, those numbers will be even lower.
For whatever reason, the IRS decides it’s going to audit somebody. What’s the beginning, the first step they take? The first thing a taxpayer will get is a letter. The IRS will not contact you by phone or email. Because the IRS contacts taxpayers by letter, it’s very important that taxpayers keep the IRS aware of their address. Because if you change addresses and the IRS doesn’t know, then the letter will go to your old address and may or may not be forwarded. If it’s not forwarded to your new address, that’s your problem.
So you’ve got to make sure you keep your current information on file with the IRS. The IRS will track your address changes based on the return filed, but let’s say you file a return in April of the year, and in May, you change your address. For the period after you change your address, until you file a new return, the IRS won’t know where you are. You need to let the IRS know. There’s a form for that—there are thousands of IRS forms. Just go to the web and search “IRS change of address form.” The form will come up. You complete it—it’s a very simple form—and then you file it.
That is really easy. There have been so many taxpayers who have come to us saying, “I don’t know what happened. The IRS is trying to collect. I never got a notice.” Then the question becomes, “Have you changed your address? When’s the last time you filed a return?” and so on. Many people don’t know about the change-of-address form. Sometimes, you alert the Postal Service, but you’ve got to let the IRS know as well.
They start by sending out a letter, and that letter will say, “You’ve been selected for audit.” It will tell you which year you’ve been selected for—one year or multiple years—and then it will tell the taxpayer the next steps: “We’d like to schedule a meeting. We’d like you, at the meeting, to provide the following information.” That request for information may expand or may be limited to just that. It will also say, “We’d like to meet at a certain date; you can suggest another date that fits your schedule.” It will also alert you to whether you’d like to have a representative serve as your point of contact with the IRS.
Some taxpayers say, “I don’t want to deal with the IRS. It’s too stressful, or I’m ill-equipped to do it on my own. I want somebody to represent me.” The letter will say, “If you’d like, you can do that. Select one and let us know.” There’s a form for that—Form 2848. You designate someone to serve as your power of attorney, your representative. A taxpayer doesn’t need to show up at the audit, which a lot of taxpayers choose to do. Probably, that’s a good thing because when I was on the IRS side, I had instances where a taxpayer didn’t quite know what to say and what not to say. Once you say something you shouldn’t, it’s very difficult to put the toothpaste back in the tube. You’ve got to be very careful, so you probably want to take the lead from the letter, which invites you to have a power of attorney or representative speak for you in the audit. Then, you meet on the selected date with the requested information, and from there, you proceed with either correspondence or the meeting itself.
It might be that the letter says, “We’re interested in talking to you about this particular topic.” In that situation, it’s often advisable to have someone represent you—don’t do it yourself because you might say something you shouldn’t say. Lawyers will often advise, “Don’t talk to the police—let me do it.” It’s much the same concept here.
Prior to this conversation, I had a call from someone considering some action with the IRS on a collection matter. I told them, “You could use me, but in what you’re needing to do, you could probably do it yourself because it’s a collection matter.” There are certain situations where you don’t necessarily need to hire a representative. But an audit is not typically one of those because an audit, if it goes sideways, can create a deep dive into more issues. It can open up other years, or you might say something that takes it from civil to criminal, and that’s the last thing you want. It’s important to be very thoughtful and careful about how you handle it to avoid the worst-case scenario.
The worst-case scenario, in my experience, has a couple of possibilities. One is that it becomes more invasive—that’s bad. The other is if it goes from civil to criminal. In the letter—that civil audit scenario—if information is presented or found by an agent that indicates there’s been some type of fraud, an intent to deceive, the agent may say, “I think this has gone beyond civil,” shut down and close the civil audit, and refer it for criminal investigation. That’s very rare, but you just want to make sure you never get near that point.
It’s sort of like life insurance. We never think we need it, but we want to make sure we have it, just in case. Getting the right representative is like insurance because you don’t know the venue, and you might get nervous and say something you shouldn’t. It’s good to have someone who knows what to say and what not to say.
That representative might be an attorney, or people sometimes go back to their CPA who prepared the return. In what situations is that appropriate, as opposed to hiring an attorney? There are three tiers:
- Represent yourself.
- Let your CPA or accountant represent you.
- Hire a tax attorney.
If you get a correspondence audit that just says, “We see $700 from Wells Fargo, but you didn’t report it,” and you realize you made a mistake, you can handle that yourself. You don’t need an accountant.
If it’s more complicated—maybe a depreciation schedule or something else you’re not comfortable with—and you relied on the accountant to handle it, but it’s still basically correct, then the accountant should handle it. They already know your return. Hiring someone new, like a tax attorney, means paying them to ramp up on all the details of your return, which costs time and money. You have to decide if it’s worth it.
Another factor is that an accountant representing you is both advocating for you and defending their own work. That sometimes creates a conflict. In more complex cases, or if you feel uncertain, you may want the next level: someone who didn’t work on the return.
In an audit, the IRS representative is looking for whatever they’re looking for. Eventually, they want to close it and say, “Here are our findings. This is what you’re going to pay,” or, “You owe no additional tax,” and then the taxpayer either says okay or not. There are distinct functions. If it’s a not-too-complicated return, you may have a Tax Compliance Officer. If it’s more complex, you may have a Revenue Agent. In either case, they’re checking if your return positions are correct. If they think something is incorrect, they’ll make an adjustment for additional tax liability and possibly a penalty. They don’t have settlement authority; it’s either correct or incorrect. Once they determine whether it’s correct or incorrect, they present their findings in what’s called a Revenue Agent’s Report. The taxpayer can then agree or disagree. If they disagree, they can file what’s called a protest letter. By filing the protest letter, they’re taking issue with the proposed adjustments and saying, “I want to take this to the next level,” which is IRS Appeals, a different function.
That seems like a good place to stop for now. We will have to come back and do another episode because this topic is fascinating, and there’s more to cover. Thank you so much for being here and sharing your expertise. Thank you to everyone for listening, and I look forward to connecting with you next time.
Fantastic. Thanks.
Get In Touch with Tony!
Anthony Kim, Partner
Kim & Rosado Law
https://www.kimrosado.com/
tony@kimrosado.com
(925) 408-4634
Resources Related to This Episode:
- Absolute Trust Talk Ep. 057 https://absolutetrustcounsel.com/057estate-tax-returns-why-you-might-want-to-file-anyway/
- Blog: All About Taxes with an Estate Planning Flair: https://absolutetrustcounsel.com/all-about-taxes-with-an-estate-planning-flair-part-i/
- Blog: All About Taxes with an Estate Planning Flair Part 2 https://absolutetrustcounsel.com/all-about-taxes-with-an-estate-planning-flair-part-ii/
- Blog: All About Taxes with an Estate Planning Flair Part 3 https://absolutetrustcounsel.com/all-about-taxes-with-an-estate-planning-flair-part-iii/
- A Will is Not Enough – Securing Your Legacy with Estate Planning Life can change in an instant. A will is not enough to be prepared. Get free access to our actionable E-book Guidebook #1 and start protecting your legacy today. https://absolutetrustcounsel.com/guidebooks/
- Learn how to comfortably define gray areas and assess your unique needs to build a secure future now effortlessly. Check out Guidebook #2, Estate Planning Beyond the Basics, here > https://absolutetrustcounsel.com/guidebooks/
- Get our free introductory guide to the most used estate planning tool, family trusts, and understand how we plan to help protect your family. Guidebook #3: https://absolutetrustcounsel.com/guidebooks/
- Absolute Trust Counsel would love to offer access to our Incapacity Planning resource page: https://AbsoluteTrustCounsel.com/Incapacity-Planning/. We’ve collected our top planning information all in one place so listeners can find videos, guidebooks, blog posts, and a host of information with tips and strategies on implementing, planning, and protecting themselves and their loved ones.
- We’re pleased to provide a library of e-books to address common estate planning questions and concerns in practical, easy-to-understand language. https://AbsoluteTrustCounsel.com/Resources/.
- ASK KIRSTEN: If you’d like Kirsten to answer your question on the air, please email her at Info@AbsoluteTrustCounsel.com.
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