The Initial Audit Interview: What the Examiner Will Ask and Why

People prepare for an audit by gathering receipts. Then they walk into the initial interview and get asked about their bank accounts, their spouse's job, whether they keep cash at home and how they paid for the boat. The receipts never come up in the first hour.

That is not an ambush. It is the IRM. Knowing what the examiner is supposed to cover lets you prepare for the conversation you are actually going to have.

Why the interview matters so much

IRM 4.10.3.4.1.1 describes initial interviews as "the foundation of an effective examination." The examiner uses the interview to understand your overall financial picture, the history and operation of any business, and how you keep records. The IRM tells examiners to prepare questions tailored to you and the issues in advance, and notes that the initial interview "may be the only time the examiner can speak directly with the taxpayer."

Initial interviews should be face to face whenever possible. The IRM says every effort should be made to hold the initial appointment within 20 to 35 calendar days of opening the case (IRM 4.10.3.4.4).

What the examiner must cover first

Before substance, the IRM requires examiners to (IRM 4.10.3.4.1.1):

• Verify that you received Publication 1, Your Rights as a Taxpayer, and Notice 609, the Privacy Act notice.
• Briefly describe the rights in those documents and answer your questions.
• Briefly describe the exam process and the resolution options if you end up disagreeing, such as a managerial conference, Fast Track Settlement, a formal appeal and the right to petition the Tax Court.

IRC 7521(b)(1) backs this up: before or at an initial in-person interview about the determination of tax, the IRS must explain the audit process and your rights under it. If that does not happen, ask for it.

The questions you should expect

Interview questions vary, but the IRM's income procedures tell you where they are headed.

Background

Who lives in the household, what everyone does for work, how long you have lived there, what changed during the year. These questions frame everything else.

Income sources

For nonbusiness returns, the IRM says the taxpayer "should be interviewed" and questioned "concerning possible sources of income, other than those reported, and accumulated funds," including bartering (IRM 4.10.4.2.2). For business returns, the initial interview is itself listed as one of the minimum income probes (IRM 4.10.4.2.3). Expect questions about every account, side activities and payments received in cash or through apps.

Cash on hand and accumulated funds

This is the most important question in many exams, and the IRM explains why. Examiners are told to establish and verify cash on hand and accumulated funds during the initial interview, because those amounts can explain an imbalance, and because "the after-the-fact 'cash in the mattress' defense cannot be used if the actual cash-on-hand and accumulated funds have already been established" (IRM 4.10.4.5.8.3).

The IRM also requires the examiner to explain the terms first. Cash on hand means undeposited currency used in normal business. Accumulated funds means cash you held that is not tied to normal business transactions. Make sure you understand which one is being asked about before you answer. Then answer accurately. An answer of "none" will be remembered. So will a vague one. See bank deposits analysis for why.

Lifestyle and large items

Large purchases, vehicles, real estate, travel and how they were paid for. The examiner is building a sources-and-uses picture.

Records

Who keeps your books, what software you use, where records are kept and how long you keep them. The IRM's scheduling procedures already asked about electronic records (IRM 4.10.2.8.2); the interview goes deeper.

The listed issues

Then, finally, the items in the letter. If you organized your documents around the IDR, this part goes quickly. See answering a Form 4564.

Should you attend?

You may not have to. Under IRC 7521(c), a properly authorized representative may represent you in an interview, and the IRS may not require you to accompany the representative unless you have been served with an administrative summons. Absent a summons, attending is your choice.

Should you? It depends. Some examiners will press for a direct conversation because the interview is where they learn the most. Some cases benefit from the taxpayer explaining a business in person. Others are better served by a representative who answers precisely and gets back to you on anything uncertain. This is a strategic call to make with your representative before the date, not in the lobby.

When your representative goes alone

The IRM allows examiners to interview your representative without you present if the representative has first-hand knowledge of your business, bookkeeping and daily operations (IRM 4.10.3.4.3.1). The examiner will probe that knowledge with questions about where your accounts are held, what books are kept and whether you use a bookkeeper.

That has two consequences. First, a representative who goes alone needs to be thoroughly briefed. "I'll have to ask my client" is fine occasionally; as a pattern it invites a request to interview you directly. Second, the IRM says that if a representative impedes or delays the exam, by missing appointments, failing to submit records or not returning calls, the examiner may begin procedures to bypass the representative and deal with you directly. Pick a representative who will keep the exam moving.

If you ask to stop an interview to consult a representative, the IRM gives you a minimum of 10 business days to consult and secure representation, and extensions can be granted case by case. Work that does not involve you, such as reviewing records already provided, continues in the meantime (IRM 4.10.3.4.5.2).

Your rights during the interview

• Recording. You may make an audio recording of an in-person interview, at your own expense and with your own equipment, on advance request (IRC 7521(a)(1)). Under IRM 4.10.3.4.7.1, the written request must reach the examiner at least 10 calendar days before the interview.
• Stopping to consult. If you clearly state at any time that you want to consult with an attorney, CPA, enrolled agent or other authorized representative, the employee must suspend the interview, even if you already answered some questions (IRC 7521(b)(2)). This does not apply to interviews initiated by an administrative summons.

Both rights are covered in detail in your section 7521 interview rights.

How to prepare

1. Review the return line by line. You should know your own return as well as the examiner does.
2. List every account you had during the year, including ones you closed.
3. Work out cash on hand and accumulated funds honestly before the meeting, with whatever support exists.
4. Know your large deposits and large purchases and where the money came from or went.
5. Answer the question asked. Short, accurate answers. "I don't know, I'll check" is a complete answer when it is true.
6. Do not guess. A wrong guess becomes a fact in the examiner's notes.

What comes after

For field exams run by SB/SE revenue agents at GS-12 and below, the end of the first appointment is when the mutual commitment date is set, the target date for the audit report (IRM 4.10.3.4.8). Expect a follow-up IDR for anything the interview raised. Read more in field audits.

The initial interview is where the examiner decides what kind of case this is. Prepared, consistent and truthful answers make it a short one.