Receiving an IRS audit notice is unsettling. The instinct for many people is to call their accountant, gather their records, and try to handle it themselves or with minimal help. That instinct is understandable — and almost always wrong.
An IRS audit is an adversarial proceeding. The revenue agent assigned to your case is experienced, trained to expand the scope of examinations when they find irregularities, and working toward an assessment. Your goal and the agent’s goal are not the same. Having a representative who understands both the technical tax issues and the procedural dynamics of IRS examinations is not a luxury — it is how audits get contained and concluded without becoming something much larger.
My name is Philip Falco. I am a tax attorney and a licensed CPA practicing in downtown Denver. I have been representing taxpayers in IRS and Colorado Department of Revenue audits since 1997. The dual license matters here in a specific way: I do the accounting work myself. I understand your financials the way a revenue agent does — which means I know exactly where the vulnerabilities are and how to address them before they become issues.
If you have received an audit notice, call **(303) 626-7000** today. The earlier you secure representation, the better your outcome.
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A Recent Result — $4 Million Business, Full Audit, No Change
In early 2024, I concluded a multi-year IRS audit for a Denver-area plumbing contractor with approximately $4 million in annual revenue. The result: no change. The IRS issued Letter 3401-S and Form 4605-A — a complete closure with zero additional assessment.
The case illustrates exactly how audits escalate and how they get contained. It began as a targeted examination of employee versus independent contractor classification and automobile expenses — two of the IRS’s most commonly audited categories for service businesses. From there, the examining agent expanded the scope to a full audit covering multiple years, with significant focus on the balance sheet and complex accounting issues that required detailed Quickbooks reconstruction, generation of multi-year general ledgers, income statements, and balance sheets.
At each stage, the goal was the same: respond to what was asked, provide nothing beyond what was requested, and prevent the audit from spreading further. That strategy held. Additional years the IRS attempted to open were closed down. The examination was contained to the original years and concluded without a single dollar of additional tax.
That outcome — no change on a full audit of a $4 million business — does not happen by accident. It happens because the representation understands both the accounting and the law well enough to control the process.
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Why IRS Audits Are Increasing — and Who Is Being Targeted
The IRS received a significant funding increase through the Inflation Reduction Act, directed specifically toward enforcement and examination activity. After years of declining audit rates due to budget constraints, the IRS has substantially ramped up examination activity — particularly for:
– **Small businesses and self-employed taxpayers** with Schedule C income
– **S corporations** and their shareholders, particularly where compensation and distributions are disproportionate
– **Real estate investors** claiming depreciation, losses, or material participation
– **Cash-intensive businesses** in industries like construction, restaurants, and personal services
– **High-income individual returns** — the IRS has stated publicly that returns over $400,000 in income are a priority
– **1099-K recipients** — with expanded third-party payment reporting, the IRS is matching credit card and payment processor data against reported income
If you are in any of these categories, an audit notice is not a surprise. What matters is what you do when it arrives.
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What Not to Do When You Receive an Audit Notice
Before covering what we do, it is worth being specific about what you should not do — because the mistakes made in the first days after receiving an audit notice often determine the outcome.
**Do not contact the IRS yourself.** Anything you say to a revenue agent is on the record and can be used to expand the scope of the examination. Revenue agents are skilled at eliciting information through what feels like casual conversation. You are not required to speak with the IRS directly once you have representation — and you should not.
**Do not provide more than what was specifically requested.** The IRS’s Information Document Request (IDR) will ask for specific documents for specific years. Providing additional years, additional categories, or documents that were not requested is one of the most common ways audits expand. Answer the question asked. Nothing more.
**Do not ignore the notice.** Ignoring an audit notice does not make it go away. It results in the IRS proceeding without your input, assessing the maximum possible tax, and issuing a Notice of Deficiency that starts a 90-day Tax Court petition clock. Missing that deadline surrenders your right to contest the assessment in Tax Court.
**Do not assume a correspondence audit is minor.** Many taxpayers treat correspondence audits as paperwork — send in the receipts, it goes away. Correspondence audits regularly expand into office or field audits when the initial response reveals additional issues. They also span multiple years: a finding in one year can be used to open the same issue in prior and subsequent years.
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Types of Audits We Handle
**Correspondence Audit**
Conducted entirely by mail. The IRS requests documentation for specific line items — a deduction, a credit, a reported expense. These appear routine but require careful handling. Providing the wrong documentation, or too much of it, frequently causes the IRS to expand the examination. We respond to every IDR strategically, providing exactly what is required and nothing beyond it.
**Office Audit**
Conducted at an IRS office. More comprehensive than a correspondence audit and conducted by a trained examiner. These typically focus on specific issues identified through IRS risk-scoring but regularly expand when examiners find additional items to question. In-person examinations require representation that understands how to control the interview and the document production.
**Field Audit**
The most comprehensive type. A revenue agent comes to your home or business, examines your books and records directly, and conducts interviews. Field audits are assigned to the most complex returns and the highest-stakes cases. They require experienced representation from the first contact with the agent.
**Employment Tax and Worker Classification Audits**
Among the most dangerous audits for small businesses. The IRS and Colorado Department of Labor have dedicated audit groups focused exclusively on employee versus independent contractor misclassification. When they make a finding, the employment tax assessment covers every misclassified worker for every open period — and the IRS shares its findings with the state, resulting in parallel assessments. The personal Trust Fund Recovery Penalty exposure for responsible individuals adds a layer of personal liability that survives the business entity.
**S Corporation and Flow-Through Audits**
S corp audits frequently focus on reasonable compensation — whether shareholder-employees are taking adequate W-2 wages or shifting income to distributions to avoid payroll taxes. They also involve basis issues, at-risk limitations, and passive activity loss rules. These audits require someone who understands both the entity-level and individual-level tax implications simultaneously.
**1099-K and Revenue Matching Audits**
With expanded third-party payment reporting, the IRS is increasingly matching credit card receipts, payment processor data (Square, Stripe, PayPal), and platform income against reported gross receipts. These audits are highly technical and often result in proposed assessments that far exceed actual unreported income due to the IRS’s failure to account for returns, refunds, and cost of goods sold.
**Colorado Department of Revenue Audits (DR 104)**
Colorado conducts its own income tax examinations, separate from IRS audits. CDOR auditors have access to federal audit findings and frequently open state examinations following an IRS adjustment. We represent taxpayers in CDOR audits directly and coordinate federal and state audit responses when both are open simultaneously.
**Colorado Department of Labor and Employment Audits**
CDLE audits focus on unemployment insurance, worker classification, and wage-and-hour compliance. These are not tax audits in the traditional sense, but the consequences — back unemployment contributions, penalties, and reclassification findings — can be severe and trigger IRS referrals. Professional representation is strongly advised.
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The Independent Contractor Misclassification Audit — A Deeper Look
Worker classification is one of the IRS’s most consistently audited issues, and for good reason — the tax exposure is enormous. When the IRS determines that workers classified as independent contractors should have been employees, it assesses:
– The employer’s share of FICA taxes for every misclassified worker for every open quarter
– The employee’s share of FICA taxes that the employer failed to withhold
– Federal income tax withholding that was never collected
– Failure-to-deposit penalties on all of the above
– Interest from the date each deposit was due
The Colorado Department of Labor and Employment then makes its own assessment for state unemployment insurance contributions on the same workers. Both agencies share information.
The Trust Fund Recovery Penalty — assessed personally against every responsible individual in the business — equals 100% of the employee-share taxes that were never withheld. Corporate or LLC liability protection does not shield against the TFRP. In businesses with multiple employees misclassified over multiple years, the personal liability exposure can exceed the business’s total assets.
Worker classification is determined by a multi-factor analysis — the IRS uses approximately 20 factors across three categories (behavioral control, financial control, and type of relationship). A written independent contractor agreement is one factor, and almost never dispositive on its own. Businesses that relied on such agreements without satisfying the other factors are in a difficult position in an audit.
If you have misclassified workers — or believe you may have — the time to address it is before the audit, not during it. A voluntary correction through IRS Form 8952 (the Voluntary Classification Settlement Program) offers significantly reduced liability compared to an audit assessment.
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The IRS Audit Statute of Limitations
Understanding the audit window is essential to assessing your exposure:
**3 years** — The standard statute of limitations for IRS examination runs three years from the later of the return’s due date or the date it was filed. For most individual returns filed on time, the IRS has three years to open an audit.
**6 years** — If a return omits more than 25% of gross income, the statute of limitations extends to six years. This is more common than many people realize — a significant unreported 1099, an omitted K-1, or missed rental income can trigger the extended period.
**No limit** — There is no statute of limitations for fraudulent returns or for years where no return was filed at all. The IRS can assess tax for any year that was never filed, indefinitely.
**The audit clock does not run during IRS processing.** If the IRS opens an examination and the matter remains unresolved, the statute is often extended by agreement (Form 872, Consent to Extend the Time to Assess Tax). You are not required to sign a statute extension, but refusing to sign can accelerate the IRS’s timeline in ways that are not always favorable. This is a strategic decision that should be made with counsel.
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From Audit to Appeals to Tax Court — The Full Continuum
Most audits resolve at the examination level — either with an agreed assessment, a partial adjustment, or a no-change result. When they do not, you have options.
**IRS Office of Appeals**
If you disagree with the examining agent’s proposed adjustment, you can request consideration by the IRS Office of Appeals — an independent body within the IRS that reviews examination results without deference to the revenue agent’s conclusions. Appeals officers have settlement authority and frequently resolve cases on terms more favorable than the examination outcome. The Appeals process is often the most efficient route to a reasonable resolution when the examination result is unreasonable.
**Tax Court**
If Appeals does not resolve the matter, or if you receive a Notice of Deficiency, you have 90 days to file a petition in the United States Tax Court. Tax Court is the taxpayer’s court — you can litigate the IRS’s assessment without paying the disputed tax first. The Tax Court’s Small Tax Case (S Case) procedure is available for disputes under $50,000 per year. Regular Tax Court procedure applies to larger cases and has a formal discovery and trial process.
**Refund Litigation**
If you have paid the disputed tax, you can file a refund claim with the IRS, allow it to be denied, and then sue for a refund in the U.S. District Court or the U.S. Court of Federal Claims. Refund litigation may be preferable to Tax Court in certain cases depending on the legal issues involved.
I handle audit representation through every stage of this continuum — from the initial IDR response through examination, appeals, and litigation if necessary. Most cases resolve well before litigation. But when litigation is the right answer, I handle it.
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How I Handle an Audit Engagement
**Step 1 — Initial review and strategy.** I review your audit notice, the years under examination, the issues identified, and your returns. Within the first consultation, you will have a clear picture of the risk, the likely strategy, and what the process looks like from here.
**Step 2 — Power of Attorney.** I file IRS Form 2848, authorizing me to represent you before the IRS and to communicate directly with the examining agent. From this point forward, you do not speak with the IRS. Everything goes through me.
**Step 3 — Document organization and review.** Before responding to any IDR, I review every document that will be provided. I identify potential vulnerabilities before the IRS sees them, determine what can be addressed proactively, and ensure that nothing beyond what is required is produced.
**Step 4 — IDR responses.** I prepare and submit responses to every Information Document Request. The goal at each stage is to answer completely, accurately, and narrowly — closing down lines of inquiry rather than opening new ones.
**Step 5 — Agent meetings and negotiations.** When face-to-face meetings with the revenue agent are required, I attend them. You do not. I present your position, address the agent’s questions, and negotiate on your behalf toward the best available result.
**Step 6 — Closing or escalation.** When the examination concludes with an agreed result, I review the closing documents before you sign anything. When it does not, I pursue appeals or litigation as appropriate.
Frequently Asked Questions
**What should I do first when I receive an IRS audit notice?**
Call a tax professional before you do anything else — before you call the IRS, before you pull your records, and before you respond to any notice. The most consequential decisions in an audit happen in the first days: what you say, what you provide, and what strategy you adopt. Starting without representation puts you at a significant disadvantage that is difficult to recover from.
**Can I represent myself in an IRS audit?**
You have the legal right to represent yourself. The practical question is whether doing so serves your interests. Revenue agents are experienced examiners who do this every day. Taxpayers who represent themselves often provide more information than required, make statements that expand the audit’s scope, and miss technical arguments that a representative would raise. For anything beyond a simple correspondence audit involving a clear math error, professional representation almost always produces a better outcome.
**How long does an IRS audit take?**
Correspondence audits can resolve in a few months. Office and field audits typically run six months to two years, depending on complexity, the number of issues, and whether the matter proceeds to Appeals. The $4 million plumbing audit referenced above spanned multiple years of examination before closing. There is no fixed timeline.
**Will the IRS audit additional years?**
The IRS can and frequently does expand an audit to additional years when it finds issues in the year under examination. This is one of the principal risks of a poorly managed audit. The goal of effective representation is containment — closing down additional years and keeping the examination limited to what was originally opened. This is not always possible, but it is always the objective.
**What is the difference between an audit and a criminal investigation?**
An audit is a civil examination of your return — the IRS is determining whether you owe additional tax. A criminal investigation is conducted by IRS Criminal Investigation (CI) and is focused on fraud, tax evasion, or other criminal violations. Civil audits can be referred to criminal investigations when revenue agents discover evidence of fraud or willful conduct. If you receive any indication that your matter has been referred to or is being reviewed by CI — including being visited by a special agent — stop all contact with the IRS immediately and call an attorney.
**Does hiring a representative trigger additional scrutiny?**
No. Taxpayers have the absolute right to representation in IRS proceedings. Revenue agents are accustomed to working with representatives and are required to conduct the examination through the representative once a valid Power of Attorney is on file. Hiring representation does not signal anything negative to the IRS.
*If the audit results in an assessment you cannot pay in full, penalty abatement →tax-penalty-abatement and installment agreements or an Offer in Compromise →]offer-in-compromise are the next steps we evaluate.”
– “An audit that uncovers payroll tax issues may also result in IRS collection action →irs-collection including bank levies and wage garnishments.”
– From the levy page: “IRS collection activity sometimes signals an open or recently closed audit. [Learn about audit representation →]IRS Audit“
Call Before You Respond to Anything
The single most important piece of advice for any taxpayer who has received an IRS audit notice: do not respond until you have spoken with a representative. The audit begins the moment you engage with the IRS — every document produced and every statement made becomes part of the record. The first response sets the tone and the scope.
Call **(303) 626-7000** today.
Philip Falco, Tax Attorney & CPA
730 17th Street, Suite 900 · Denver, CO 80202
phil@coloradolegal.com
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*This page is for general informational purposes and does not constitute legal advice. Audit circumstances vary significantly by case. Contact our office to discuss your specific situation.*