What Happened

A story that has tax professionals talking nationwide broke this week: according to reports from the Associated Press, the Internal Revenue Service has agreed to drop pending audit-related inquiries into a sitting president, his adult sons, and the family business as part of a settlement of a lawsuit tied to the 2018 disclosure of the president’s tax returns. The one-page settlement reportedly bars the federal government from examining or prosecuting those filings going forward, and was attached to a larger settlement that established a compensation fund for individuals the administration alleges were improperly investigated.

According to coverage by the AP, ProPublica, and The New York Times, one of the audits that may now be closed involved a question of whether the same business losses from a Chicago property were allegedly used twice to reduce tax liability — a maneuver that, if the IRS had prevailed, could have produced a bill estimated at more than $100 million including penalties. The taxpayer has denied any wrongdoing.

Former IRS officials and tax law scholars quoted in the reporting have called the arrangement unprecedented and warned it could erode public confidence in the fairness of the tax system. Some experts expect the immunity provision to face court challenges.

We are writing about this story not to weigh in on the politics, but because the headlines are prompting an entirely fair question from our New York clients: “If high-profile taxpayers can negotiate their way out of an audit, what happens to the rest of us?” The honest answer is that ordinary taxpayers do not get immunity deals — but they do have meaningful rights, and how you respond to an audit notice can change the outcome dramatically.

Who May Be Affected

IRS audits are not reserved for the ultra-wealthy. In our Jericho office, we regularly see audit notices land in the mailboxes of:

• W-2 employees who claimed sizable unreimbursed expenses or charitable deductions.
• Small business owners and sole proprietors — Schedule C filers face one of the highest audit selection rates relative to filing volume.
• Real estate investors claiming passive activity losses, cost segregation deductions, or 1031 exchange treatment.
• High-income households ($400,000+), which the IRS has publicly prioritized for increased examination.
• Cryptocurrency traders who may have under-reported digital asset transactions.
• Cash-intensive businesses — restaurants, salons, contractors, laundromats.
• Taxpayers with foreign accounts or unfiled FBARs.
• Estates and trusts with valuation-sensitive assets.

If you fall into any of these categories, you are statistically more likely to be selected for examination — and you should plan accordingly.

Audit Types and Issues That May Arise

Not every audit is the same. Understanding what kind of examination you face changes everything about how to respond:

• Correspondence audits — handled by mail, usually narrow in scope, often triggered by a 1099 or W-2 mismatch.
• Office audits — conducted at an IRS office, typically covering several line items on a return.
• Field audits — the most serious civil examination, where a revenue agent visits your home, business, or representative’s office.
• TCO (Tax Compliance Officer) examinations — more in-depth than correspondence work, common for Schedule C and rental income issues.
• Egg-shell audits — a civil audit in which possible criminal exposure may exist; these require extreme caution and immediate professional representation.
• New York State Department of Taxation and Finance audits — separate from the IRS, often triggered by residency disputes, sales tax issues, or pass-through entity tax filings.

Common issues we see flagged include unreported income, overstated deductions, questionable business losses, S-corporation reasonable compensation, hobby-loss rules, worker classification (1099 vs. W-2), and basis questions on the sale of real estate or a business.

What’s Actually at Stake

When an audit goes badly, the financial consequences add up quickly:

• Additional tax owed on the disputed items.
• Accuracy-related penalties of 20% under IRC §6662 for substantial understatements or negligence.
• Civil fraud penalties of 75% under IRC §6663, where the IRS alleges intentional wrongdoing.
• Failure-to-file and failure-to-pay penalties under IRC §6651.
• Interest, which compounds daily from the original due date of the return.
• New York State assessments, which typically follow federal adjustments under the state’s reporting requirement.
• Information return penalties for missed 1099s, K-1s, or international forms such as Form 5471 or 8938.
• In rare cases, criminal referral under IRC §7201 (tax evasion) or §7206 (false return).

Documentation That Strengthens Your Position

The single biggest predictor of audit outcomes is the quality of your records. If you receive an examination notice, gather and organize:

• Original receipts, invoices, and canceled checks supporting deductions.
• Bank and brokerage statements for all relevant accounts and years.
• Mileage logs, appointment calendars, and travel itineraries for business expense claims.
• Closing statements (HUD-1 / Closing Disclosure) for real estate transactions.
• Contemporaneous written acknowledgments for charitable contributions of $250 or more.
• Corporate minutes, operating agreements, and capitalization tables.
• Appraisals for non-cash gifts or estate assets.
• Prior-year returns to establish carryovers, basis, and loss tracking.
• Communications with prior preparers — these can establish reasonable cause for penalty abatement.

The IRS will draw negative inferences from missing records. Reconstructing documentation after the fact is possible but harder, and the Cohan rule (which allows estimation of certain expenses) is far weaker than it used to be.

What to Do Next

If you have received an IRS or New York State audit notice — or you have reason to believe one is coming — there are practical steps to take immediately:

1. Do not ignore the notice. Most audit letters carry a 30-day response window. Missing the deadline can convert a manageable examination into a default assessment.
2. Do not contact the auditor directly before consulting a tax professional. Casual statements made in initial conversations frequently become the centerpiece of later adjustments.
3. Preserve everything. Do not discard records, alter spreadsheets, or “clean up” QuickBooks files. Spoliation can transform a civil dispute into something much more serious.
4. Identify the years and issues under review before responding. Scope creep is a real risk — auditors often expand into adjacent years when given the opportunity.
5. Consider a Power of Attorney (Form 2848). This routes communication through your representative and prevents direct contact that could damage your position.
6. Track the statute of limitations. The general assessment period is three years, six years for substantial omissions of income, and unlimited for fraud or unfiled returns.
7. Evaluate appeal options early. IRS Appeals, Tax Court, and refund litigation in district court each have different procedures and deadlines.

The story dominating the news this week is a reminder that the rules look different at the very top. For everyone else, the rules are the rules — and the best protection is preparation, documentation, and qualified representation.

If you or a family member has received an IRS or New York State audit notice, or you want a confidential review of a return you’re worried about, the team at DeFreitas & Minsky LLP, CPA has been guiding New York taxpayers through examinations, appeals, and resolutions for more than 70 years. Call (516) 689-1515 or visit https://dmaccountingfirm.com to schedule a free consultation.

Frequently Asked Questions

How will I know if the IRS is auditing me?

The IRS communicates audit selections by U.S. mail — never by phone, email, or text. If you receive a call or message claiming to be from the IRS demanding immediate payment, it is almost certainly a scam. A real audit notice will reference a specific tax year and identify the items under review.

Can the IRS just audit any year on my return?

Generally, the IRS has three years from the date you filed to assess additional tax. That window extends to six years if more than 25% of gross income was allegedly omitted, and there is no time limit if the return is alleged to be fraudulent or was never filed. New York State follows similar but not identical rules.

Should I talk to the IRS auditor myself or hire someone?

You have the right to represent yourself, but many taxpayers say more than they should in initial conversations. A CPA, enrolled agent, or tax attorney can act through Form 2848 (Power of Attorney) so the auditor speaks only with your representative — which protects you from inadvertent admissions.

What if I can’t find receipts for deductions the IRS is questioning?

Missing records do not automatically mean the deduction will be disallowed. Bank statements, credit card records, vendor invoices, and reconstructed logs may support the claim. The IRS may allow reasonable estimates for certain categories, but contemporaneous documentation is always stronger.

Can I be charged with a crime over an audit?

Most audits are purely civil and end in either no change, a refund, or additional tax owed with penalties. Criminal referrals are rare and typically involve allegations of intentional fraud, falsified documents, or unreported income from illegal sources. If a revenue agent suddenly stops asking questions and disappears, that may signal a referral and warrants immediate professional consultation.

Does the news about presidential audit immunity affect ordinary New York taxpayers?

No. According to reports, the settlement is narrowly limited to specific filings of specific individuals and entities and does not change the law that applies to anyone else. New York residents remain subject to the same federal and state audit rules they faced before the headlines.

What’s the difference between an IRS audit and a New York State audit?

They are separate examinations conducted by different agencies. New York frequently audits residency status, sales tax, and pass-through entity tax — areas the IRS does not touch. A federal adjustment will usually trigger a corresponding New York adjustment, so coordinating responses across both is important.

How much does it cost to fight an audit?

It depends on complexity. A correspondence audit on a single issue may resolve in a few hours of professional time, while a field audit covering multiple years and entities can require substantially more work. In most cases the cost of competent representation is a fraction of the tax, penalties, and interest at stake.

Original reporting: timesleader.com.