A machine matched a $14,800 brokerage 1099-B against a return that never reported it. No revenue agent has ever seen the file, yet a proposed assessment is already in the mail.
An examination is the IRS's review of whether a return is correct. The IRS authority to investigate comes from IRC §7602. It lets the IRS check the correctness of any return, determine the tax owed when no return was filed, and collect tax.
That grant gives the IRS four concrete powers:
- It can examine books, papers, records, and other data relevant to the inquiry.
- It can summon the taxpayer, or any person who holds relevant records, to appear and testify under oath.
- It can take testimony and require documents to be produced under a summons, a formal demand that can be enforced in federal district court.
- It can contact third parties (people other than the taxpayer), but only under the advance-notice rules of IRC §7602(c).
KEY: The IRS authority to investigate does not require probable cause or any suspicion of fraud. Being selected for examination is not an accusation.
Common mistakes
- Treating the 30-day letter as the ticket to Tax Court. The 30-day letter opens the door to Appeals only. Tax Court jurisdiction comes solely from the statutory notice of deficiency, and its 90 days cannot be extended for any reason.
- Assuming §7525 covers the workpapers. The limited practitioner privilege covers tax advice, not return preparation. A candidate who protects a depreciation schedule under IRC §7525 has the scope exactly backwards. And the privilege disappears the moment the case turns criminal.
- Applying Cohan to meals and mileage. Estimation is barred for every §274(d) item. Perfect proof of payment does not save a $31,000 travel-and-meals deduction when the business purpose is undocumented, so the disallowance stands.
Bottom line
- IRC §7602 authority: examine records, summon persons, take testimony, contact third parties after 45-day notice; §7605(b) limits inspections to one per year absent written notice.
- Place of investigation: reg. §301.7605-1 reasonableness, driven by where the books are; a represented taxpayer need not attend under §7521(c).
- IRC §7525 privilege: tax advice only, noncriminal IRS and federal tax proceedings only, never criminal, never state, never tax shelter promotion.
- Substantiation: §6001 sufficient records generally; §274(d) strict substantiation for travel, meals, gifts, listed property, where Cohan estimation is barred.
Exam shortcut
Read the notice number first, before the dollars. "CP-2000" means computer matching, so hunt for a missing basis or an item already reported elsewhere. "Letter 525 or 915 plus Form 4549" means a human examined it and the clock is 30 administrative days to Appeals. "Notice of deficiency" or "CP-3219A" means 90 jurisdictional days to Tax Court, and no extension exists.
The full lesson (about 5,728 words, 38 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- 3
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