An IRS or California FTB audit notice arriving in the mail produces an immediate and specific kind of anxiety. The instinct is to act quickly – to respond, to explain, to get it resolved. That instinct is understandable and also one of the most reliable ways to make the situation significantly worse. Tax Crunch works with Bay Area individuals and businesses navigating audit notices, and the pattern we see repeatedly is that the decisions made in the first few weeks after receiving that letter – before anyone with tax expertise has been consulted – shape the entire trajectory of what follows. The notice itself is serious. The response to it is often what determines the outcome.
Before doing anything, understanding what you’re actually dealing with is the essential first step.
The Three Types of IRS Audits and What They Actually Mean
Not all audit notices are the same, and the type of notice you received tells you a great deal about the scope of what’s being examined and how to approach it.
A correspondence audit is conducted entirely through the mail. The IRS identifies a specific item on a return – a deduction, a discrepancy between what you reported and what was reported by a third party (your employer, a broker, a bank), or an income figure that doesn’t reconcile – and requests documentation for that specific item. Correspondence audits are the most common type and are often the least serious, but “least serious” doesn’t mean they can be handled carelessly. Providing the wrong documentation, providing too much, or failing to address the specific issue clearly can expand what started as a narrow inquiry.
An office audit requires you to appear at an IRS office and bring documentation requested in the notice. These are more involved than correspondence audits and indicate a more substantive examination of your return. The specific items listed in the notice are the starting point, but experienced auditors frequently identify additional issues during an office audit that weren’t mentioned in the original notice. This is precisely why the initial response and preparation matter.
A field audit is the most intensive type. An IRS agent visits your home or place of business, and the scope of the examination is typically broader. Field audits of individuals are relatively uncommon; they’re more frequently directed at businesses with complex returns. If you’ve received a field audit notice, professional representation before the audit begins is not optional.
California FTB audits follow a parallel structure with California-specific wrinkles. California has its own income tax system, its own audit triggers, and its own audit procedures. A federal audit doesn’t automatically trigger a California audit, but the FTB does receive information from IRS audit resolutions, and an unfavorable federal outcome can initiate a separate California examination.
The Mistakes That Complicate Audits More Than the Original Issue
The most consistent observation from audit representation work is that taxpayer behavior in the early days after receiving an audit notice frequently compounds the problem. The original tax issue – whatever discrepancy or deduction triggered the audit – is often manageable. The consequences of how it’s handled are sometimes more significant than the underlying matter itself.
Responding to a correspondence audit without reading the notice carefully. An IRS correspondence audit asks for documentation of a specific item. Taxpayers who respond by sending everything that might possibly be relevant – entire years of bank statements, every receipt, a broad explanation of their financial situation – often introduce new information that opens additional lines of inquiry. The audit that started with one question ends with several. The appropriate response addresses exactly what was asked and no more.
Communicating directly with the IRS without understanding how that communication can be used. Anything a taxpayer says to an IRS agent is usable against them. Casual explanations, off-hand comments, or attempts to explain “what really happened” in conversational terms can be treated as admissions that are difficult to walk back. This is one of the concrete advantages of having a tax professional handle all communications on your behalf – nothing gets said informally that shouldn’t be part of the formal record.
Agreeing to extend the statute of limitations without strategic analysis. IRS agents frequently request that taxpayers sign a Form 872 consenting to an extension of the three-year statute of limitations within which the IRS can assess additional taxes. There are circumstances in which agreeing to an extension is reasonable – when the audit is proceeding productively and additional time genuinely helps both parties. There are also circumstances in which it primarily benefits the IRS by preserving assessment authority that would otherwise expire. An experienced practitioner can assess which situation applies.
Ignoring the notice. The IRS will escalate unanswered audit inquiries. Missing deadlines in a correspondence audit can result in a Notice of Deficiency – an assessment of additional taxes with a 90-day window to petition the Tax Court before the liability becomes fixed. Ignoring an audit notice until the situation reaches that stage removes options that were available at the beginning.
Why Bay Area Tax Returns Draw Particular Scrutiny
The San Francisco Bay Area’s tax profile – the specific income sources, deductions, and financial activity that appear disproportionately often on returns in this region – creates a set of audit triggers that are worth understanding.
Restricted stock units and other equity compensation create reporting complexity that produces audit attention. RSUs vest and are reported as ordinary income by the employer; subsequent sale of those shares generates capital gain or loss reported separately. Mismatches between what an employer reports on a W-2, what a broker reports on a 1099-B, and what appears on the return are a documented audit trigger. For employees at tech companies who received equity compensation, having those transactions reported and reconciled correctly is not straightforward.
Schedule C income – self-employment income and the deductions claimed against it – draws IRS attention because the self-employment population has historically had higher non-compliance rates than wage earners. For the Bay Area’s large freelance, gig economy, and independent contractor population, Schedule C returns are examined at higher rates than W-2-only returns. Home office deductions, vehicle deductions, and meals and entertainment expenses claimed on Schedule C are common examination targets.
Cryptocurrency transactions are an area of active IRS enforcement. The IRS has issued John Doe summonses to cryptocurrency exchanges and has been building compliance programs targeting unreported cryptocurrency income and gains. Bay Area residents with cryptocurrency holdings who haven’t reported all transactions accurately are in an increasingly visible compliance risk category.
What a CPA Who Is Also an Attorney Provides in an Audit Context
Most tax professionals – enrolled agents, CPAs without law degrees – can represent taxpayers before the IRS. What they cannot provide is attorney-client privilege. Anything a taxpayer tells a CPA in the course of the engagement is not automatically protected the way communications with an attorney are. In matters where an audit might develop into a civil fraud determination or a criminal referral, the privilege question becomes significant.
A practitioner who is both a CPA and a licensed attorney brings two capabilities that audit representation benefits from: the accounting expertise to understand the return and the evidentiary record at a detailed level, and the legal training to understand how the audit process intersects with taxpayer rights, IRS procedures, and the potential for the matter to escalate into litigation or criminal investigation. For straightforward correspondence audits, this dual credential may be more than the situation requires. For audits involving complex equity compensation, substantial Schedule C deductions, cryptocurrency, or any facts that suggest the IRS is looking at more than a clerical discrepancy, it matters.
Contact Tax Crunch Before You Respond
If you’ve received an IRS or California FTB audit notice, the most valuable thing you can do before taking any action is speak with a qualified tax professional about what the notice actually means and what an appropriate response looks like. Tax Crunch serves individuals and businesses throughout San Francisco, the Peninsula, and the Bay Area, with representation led by Joseph Chan, CPA and licensed attorney.
Don’t respond to the notice, call the IRS, or send any documentation before you’ve had that conversation. The first 30 days matter. Contact Tax Crunch to discuss your notice and understand your options before any deadline runs.
