Headlines about a recent settlement between the federal government and a prominent taxpayer have left a lot of people asking a simple question: if someone at the top can allegedly walk away from a major IRS audit, what happens to the rest of us when the IRS comes knocking?

The short answer, from a CPA’s perspective, is that the average taxpayer in New York does not get sweeping immunity deals. You get a notice in the mail, a deadline, and a stack of documents to produce. That is why understanding the audit process – and your real-world options – matters more than ever.

What Happened

According to reports, the Internal Revenue Service recently agreed to settle a lawsuit brought against it over an earlier leak of a sitting public figure’s tax returns. As part of that resolution, the government reportedly agreed to drop pending examinations of the taxpayer, his family members, and his affiliated business entity, and is said to be “forever barred” from examining or prosecuting their current filings.

One of the audits allegedly closed by the deal involved a deduction strategy tied to a Chicago property, where the taxpayer is reported to have used the same losses to reduce taxable income more than once. Press accounts indicate the potential tax exposure, if the IRS had prevailed, could have exceeded $100 million including penalties.

Former IRS officials and tax-policy commentators have called the arrangement unusual and have warned that it could erode public confidence in the fairness of federal tax enforcement. None of the underlying allegations have been resolved on the merits in court.

For everyday New York taxpayers, the lesson is not about politics. It is about how the audit machinery actually works when you are the one being examined.

Who May Be Liable

In a typical IRS audit, the parties who may be on the hook for additional tax, interest, and penalties include:

• Individual taxpayers whose personal returns are selected for examination.
• Married couples filing jointly, where one spouse may be liable for the other’s understatement absent innocent-spouse relief.
• Owners of pass-through entities (S corporations, partnerships, single-member LLCs), where business adjustments flow through to personal returns.
• Closely held corporations and their officers, particularly when payroll taxes or shareholder distributions are at issue.
• Estates and trusts, which can face significant exposure on valuation and basis questions.

The IRS may also assert liability against responsible persons – such as bookkeepers, controllers, or officers – under the Trust Fund Recovery Penalty when employment taxes go unpaid.

Issues That Commonly Drive an IRS Audit

Most audits we see at the CPA level revolve around a recurring set of issues. Each one has its own technical rules:

• Unreported income – Mismatches between 1099s, W-2s, K-1s, or third-party reporting and what was reported on the return.
• Aggressive deductions – Business expenses, home-office claims, meals, travel, and vehicle deductions that lack contemporaneous documentation.
• Loss limitations – Passive activity losses, at-risk rules, and net operating loss carryforwards used in ways the IRS may challenge.
• Basis and double-dipping concerns – Claiming the same loss or expense in more than one period or through more than one entity, which the IRS treats as an abusive position.
• Cancellation of debt income – Forgiven debt that was not properly reported, including in workout or bankruptcy situations.
• Charitable contributions – Especially non-cash gifts, conservation easements, and gifts of closely held interests.
• Foreign accounts and assets – FBAR and Form 8938 compliance, where penalties can be severe.
• Cryptocurrency transactions – Increasingly a focus area, particularly for New York residents who traded actively.

Exposure Taxpayers May Face

If the IRS proposes adjustments and they stick, a taxpayer could be looking at:

• Additional tax for each open year (generally three years, sometimes six, and unlimited for fraud or unfiled returns).
• Interest, which compounds daily and is non-negotiable in most cases.
• Accuracy-related penalties of 20% on substantial understatements or negligence.
• Civil fraud penalties of 75% where the IRS alleges intentional wrongdoing.
• Information return penalties for late or missing FBARs, 5471s, and similar filings.
• New York State tax exposure – The New York State Department of Taxation and Finance typically receives federal audit adjustments through the Revenue Agent Report process, and state tax, interest, and penalties usually follow. New York residents and part-year residents should expect a parallel state assessment.

In certain cases involving alleged fraud or willful evasion, criminal exposure could be in play. That is a separate track and requires counsel experienced in both tax and criminal procedure.

Records That Strengthen Your Position in an Audit

Audits are won on documentation, not arguments. The taxpayers who fare best are usually the ones who can produce:

• Original receipts, invoices, and canceled checks tied to deductions claimed.
• Bank and brokerage statements that reconcile to reported income.
• Mileage logs, appointment calendars, and travel itineraries kept contemporaneously.
• Closing statements, depreciation schedules, and basis records for real estate.
• Loan documents, including any modifications, forgiveness, or workout agreements.
• Corporate minutes, operating agreements, and shareholder loan documentation.
• Prior-year returns and any prior IRS correspondence on the same issue.
• Appraisals supporting valuations on non-cash charitable gifts or estate filings.

If records are missing, there are still options – the Cohan rule, reconstruction from third-party sources, and reasonable estimates – but they work best when guided by a tax professional who has been through the process.

What to Do Next If You Receive an IRS Notice

A few practical steps that nearly always pay off:

1. Read the notice carefully and note every deadline. Most IRS letters give you 30 days to respond. Missing that window narrows your options quickly.
2. Do not call the agent on your own until you understand what is being examined. Casual statements made over the phone can become part of the record.
3. Pull your return and supporting workpapers for the year(s) in question before responding.
4. Preserve electronic records – cloud accounting files, bank downloads, and email threads with vendors or advisors.
5. Consider a power of attorney (Form 2848) so a qualified representative can speak with the IRS on your behalf.
6. Think about the state. Federal adjustments typically trigger New York follow-up. Planning for both at the same time saves money.
7. Mind the statute. The IRS may ask you to extend the statute of limitations on Form 872. That is a strategic decision, not an automatic one.

If you or a family member has received an audit letter, a CP2000 notice, or a request for documents from the IRS or New York State, the time to act is now – before deadlines start running. Talk to DeFreitas & Minsky for 70+ years of trusted CPA guidance – free consultation. Call (516) 689-1515 or visit https://dmaccountingfirm.com to speak with our team.

Frequently Asked Questions

Can the IRS really audit me years after I filed?

Yes. The standard look-back is three years from the date the return was filed, but it extends to six years for substantial understatements of income and is unlimited for unfiled returns or alleged fraud. New York generally follows similar timeframes, and federal adjustments can reopen state years that you thought were closed.

How is an IRS audit different from a CP2000 notice?

A CP2000 is an automated notice proposing changes based on mismatched third-party information, such as 1099s that were not reported. A full audit is a broader examination of one or more line items or the entire return. Both should be answered in writing and on time, but the strategy is different.

What if I cannot find receipts for deductions I claimed?

You may still be able to substantiate expenses through bank records, credit card statements, vendor confirmations, or reasonable reconstruction under the Cohan rule. The IRS is not required to accept estimates, so the quality of your reconstruction matters. A CPA who handles audits regularly can help build the strongest record possible.

Do I have to let the IRS into my home or business?

Generally no, not without proper procedure. Most audits are handled by mail or at an IRS office. Field audits at your location do occur, particularly for businesses, but a representative can often arrange for records to be reviewed elsewhere. You have the right to be represented and to limit the scope of contact.

Will a federal audit trigger a New York State audit?

Usually yes. The IRS shares its Revenue Agent Report with state tax authorities, and New York will generally assess additional state tax, interest, and penalties on the same adjustments. New York residents should plan for both fronts from day one rather than waiting for the state notice to arrive.

Can penalties be reduced or removed?

Often, yes. Reasonable cause relief, first-time abatement, and statutory exceptions can eliminate or reduce accuracy and late-filing penalties in the right circumstances. Interest is harder to abate, but reducing the underlying tax and penalties also reduces the interest that runs on them.

What if my spouse handled the taxes and I had no idea there was a problem?

Innocent-spouse relief under IRC §6015 may be available if you can show you did not know and had no reason to know of the understatement, and that it would be unfair to hold you liable. The rules are technical and the IRS scrutinizes these claims closely. Documentation of household finances and decision-making is critical.

Should I hire a CPA, an attorney, or both?

For most civil audits, an experienced CPA who represents clients before the IRS is the right starting point. If criminal exposure, a summons, or a grand jury is in play, tax counsel should be involved alongside the CPA. The two roles often work together, and a good firm will tell you up front which professionals you actually need.

Original reporting: texarkanagazette.com.