IRS Examination Procedures
IRC §7602 examination authority · Powell summons framework · IRC §7491 burden shifting · Cohan doctrine · 30-day letter and Appeals · Notice of Deficiency · IRC §6501 statute of limitations · IRM 4.13 audit reconsideration
Module
7 of 8
Course ID
TRT-107
Level
EA Part 2 / CPA Practice
Updated
May 2026
Section 1 · IRC §7602
The statutory examination authority and its Powell limits.
IRC §7602(a) grants the Secretary of the Treasury broad authority to examine "any books, papers, records, or other data which may be relevant or material" to ascertaining the correctness of any return, determining tax liability, or collecting any tax. The examiner's authority extends to summoning the taxpayer, third parties, or custodians of records to appear, testify, and produce documents under §7602(a)(2).
The IRS's summons authority is not unlimited. The Supreme Court in United States v. Powell, 379 U.S. 48 (1964) established the four-part framework governing enforceability: (1) the investigation is conducted for a legitimate purpose; (2) the inquiry may be relevant to that purpose; (3) the information sought is not already in the IRS's possession; and (4) the administrative steps required by the Code have been followed. Powell established an initial presumption of validity — the IRS makes a prima facie showing through the examiner's affidavit, and the taxpayer must then demonstrate that a Powell prong is unmet, that the IRS is acting in bad faith, or that enforcement would constitute an abuse of the court's process.
The Supreme Court later addressed improper purpose in United States v. Clarke, 573 U.S. 248 (2014): a taxpayer is entitled to examine the summoning agent about the reasons for the summons when the taxpayer can point to specific facts giving rise to a plausible inference of bad faith — mere allegation without specific factual support is insufficient. Clarke clarifies that the right to an evidentiary hearing on improper purpose requires a specific factual showing, not merely a request or conclusory assertion.
IRC §7602(c) (amended by the Taxpayer First Act of 2019, Pub. L. 116-25, §1206) requires the IRS to give the taxpayer 45 days advance notice via Letter 3164 before contacting third parties regarding the examination. The notice requirement serves as an opportunity for the taxpayer to provide the information directly and avoid third-party contact that may harm business relationships. Important: the notice lists the category of third parties (e.g., "your bank, your customers, or other third parties"), not specific named parties, allowing the IRS operational flexibility while providing the taxpayer notice.
IRC §7602(d)(1) suspends the IRS's civil summons authority once a Department of Justice referral for criminal prosecution is in effect. Civil examination authority cannot be used as a substitute for grand jury discovery after the criminal referral. United States v. LaSalle National Bank, 437 U.S. 298 (1978), addressed the institutional good-faith requirement — the IRS cannot issue summonses in bad faith to gather evidence after it has determined to recommend criminal prosecution.
IRC §7609 provides special procedures for third-party summonses — the summoned party must receive a copy of the summons, and the taxpayer has the right to intervene in any proceeding to quash the summons. United States v. Stuart, 489 U.S. 353 (1989), confirmed that §7602 authority extends to treaty-enabled examinations for foreign taxing authorities.
Section 2 · Powell framework
The four-part summons enforceability standard.
United States v. Powell, 379 U.S. 48, 57-58 (1964)
Legitimate purpose
The examination is conducted for a legitimate purpose — ascertaining tax liability, not for harassment, improper criminal referral, or to gather evidence for non-tax proceedings.
Relevance
The information sought may be relevant to the legitimate purpose. §7602 uses 'may be relevant' — a low standard, not requiring demonstrated relevance to a specific issue.
Non-possession
The IRS does not already possess the information sought. Summons for documents already in IRS hands can be quashed.
Administrative steps
The IRS has followed all administrative steps required by the Code — proper notice, authorization, and summons issuance procedure per IRM 25.5.
The four-part Powell standard is the principal procedural tool for challenging IRS summons enforcement. Practitioners routinely review each prong on engagement: has the IRS made a prior referral to DOJ (suspending §7602 authority under §7602(d))? Is the information already reflected in transcripts already obtained? Has the administrative procedure — notice, IRM 25.5 requirements — been followed? Is the stated purpose legitimate or is the summons being used as a pretext for a purpose §7602 does not authorize?
Section 3 · IRC §7491 burden-shifting
Burden of proof in court proceedings.
The default procedural rule is that the taxpayer bears the burden of proof in Tax Court proceedings. Under Tax Court Rule 142(a), the IRS's determinations in a Notice of Deficiency are presumptively correct, and the taxpayer bears the burden of proving incorrectness. IRC §7491(a), enacted by the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 1998), Pub. L. No. 105-206, §3001, shifts the burden to the IRS in court proceedings when all four conditions are met.
Credible evidence — §7491(a)(1)
The taxpayer introduces credible evidence on the factual issue at issue. The Tax Court in Higbee v. Commissioner, 116 T.C. 438, 442 (2001), defined 'credible evidence' as evidence that, after critical analysis, the court would find sufficient to base a decision in the taxpayer's favor — lower than preponderance but higher than mere assertion.
Substantiation — §7491(a)(2)(A)
The taxpayer has complied with all substantiation requirements imposed by the Internal Revenue Code — including IRC §274(d) strict substantiation for travel, meals, entertainment, gifts, and listed property.
Recordkeeping — §7491(a)(2)(B)
The taxpayer has maintained all records required under the Code (IRC §6001 and Treas. Reg. §1.6001-1). Failure to maintain required records precludes burden-shifting even if substantiation is subsequently reconstructed.
Cooperation — §7491(a)(2)(C)
The taxpayer has cooperated with reasonable IRS requests for witnesses, information, documents, meetings, and interviews. This is the most procedurally consequential prong — document cooperation specifically throughout the examination.
Statutory exclusions: IRC §7491(a)(2)(C) excludes corporations, partnerships, and trusts with net worth exceeding $7 million. IRC §7491(b) addresses penalty burden — for penalties subject to deficiency procedures, the IRS bears the burden of production. IRC §7491(c) addresses statistical reconstruction — the IRS bears the burden when reconstructing income from statistical data.
Section 4 · Cohan — estimation when records are imperfect
When the taxpayer can prove existence but not amount.
Cohan v. Commissioner, 39 F.2d 540, 544 (2d Cir. 1930) — Judge Learned Hand
"Absolute certainty in such matters is usually impossible and is not necessary; the Board should make as close an approximation as it can, bearing heavily, if it chooses, upon the taxpayer whose inexactitude is of his own making."
Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930) established that courts may estimate the amount of deductible expenses where the taxpayer establishes the expense was incurred but cannot prove the exact amount. The case involved Broadway entertainer George M. Cohan's $55,000 in unsubstantiated business travel and entertainment. The Second Circuit through Judge Learned Hand reversed the Board of Tax Appeals's complete disallowance and remanded for estimation. The Cohan rule was reaffirmed in Villa v. Commissioner, T.C. Memo. 2023-155 (Dec. 28, 2023), and Alvarado v. Commissioner, T.C. Memo. 2024-1 (Jan. 3, 2024).
Three critical limitations:
Limitation 1 — Existence must be established
Cohan allows estimation of amount only after the taxpayer demonstrates the expense actually occurred. Pure guesswork is not permitted. Williams v. United States, 245 F.2d 559 (5th Cir. 1957), and Coloman v. Commissioner, 540 F.2d 427, 432 (9th Cir. 1976), confirm that Cohan is not 'a substitute for burden of proof.'
Limitation 2 — IRC §274(d) categorical override
Travel, meals, entertainment, business gifts, and 'listed property' (vehicles, computers, cell phones, and other property subject to §280F) require strict substantiation under IRC §274(d): amount, time, place, business purpose, and business relationship. Cohan cannot supply what §274(d) demands — Sanford v. Commissioner, 50 T.C. 823 (1968), aff'd, 412 F.2d 201 (2d Cir. 1969).
Limitation 3 — Discretionary application
A court's refusal to apply Cohan is not appealable error. Courts may decline to estimate where recordkeeping was egregiously poor or reconstruction is impossible. Where applied, courts 'bear heavily' upon the taxpayer — estimates skew toward the lower bound.
Practitioner strategy for record reconstruction: Bank statements, credit card statements, vendor records, mileage logs reconstructed from contemporaneous indicia, calendar entries, third-party affidavits, photographs of receipts with metadata, app-based expense tracking records. Invoke Cohan as a fallback for residual unsubstantiated non-§274(d) items, citing the post-2024 Villa/Alvarado reaffirmations.
Section 5 · End of examination — the 30-day letter
Where the examination concludes — and where Appeals begins.
At the conclusion of an examination with proposed adjustments, the IRS issues a 30-day letter — typically Letter 525 (income tax examinations) or Letter 950 (unagreed office and field examinations). The 30-day letter transmits: (1) Form 4549 (Income Tax Examination Changes) — itemizing proposed adjustments; (2) Form 886-A (Explanation of Items) — explaining legal and factual basis; (3) Form 870 (Waiver of Restrictions on Assessment) — for signature if agreeing; (4) Pub 5 (Your Appeal Rights); (5) Pub 556 (Examination of Returns).
Path 1 — Agree
Sign Form 870 and pay (or set up payment arrangements). The assessment becomes final; no further administrative review.
Path 2 — Protest to Appeals
File a written protest within 30 days. For disputes under $25,000, Form 12203 (Request for Appeals Review) suffices. For disputes over $25,000, a formal written protest per IRM 8.6.1 is required — containing: taxpayer name/address, statement requesting Appeals, copies of disputed items, tax periods, list of changes not agreed to, reasons for disagreement, facts supporting position, applicable law/authority, and penalties-of-perjury declaration.
Path 3 — Do nothing
After 30 days, the IRS issues a Notice of Deficiency under IRC §6212 (the '90-day letter'), triggering Tax Court petition rights under IRC §6213(a).
Appeals consideration is conducted by Appeals Officers under IRM Part 8. The Appeals process is informal — typically by phone or video conference. Appeals Officers weigh the "hazards of litigation" — the IRS's likelihood of prevailing in Tax Court. Cases that resolve at Appeals typically settle for less than original examination adjustments because Appeals officers have explicit settlement authority that examiners do not.
Section 6 · IRC §6212 — the 90-day letter
Tax Court petition rights under IRC §6213(a).
When the 30-day window expires without protest, or Appeals concludes without agreement, the IRS issues a Notice of Deficiency under IRC §6212. The Notice of Deficiency — the "90-day letter" — is the statutory predicate for assessment under deficiency procedures and the trigger for Tax Court jurisdiction.
The Notice of Deficiency must: (a) state the amount of the deficiency; (b) explain the basis; (c) advise the taxpayer of the 90-day window to file a Tax Court petition; (d) be sent by certified or registered mail to the taxpayer's last known address per IRC §6212(b). The 90-day window under IRC §6213(a) is 150 days for taxpayers residing outside the United States. The window is jurisdictional — late-filed Tax Court petitions are dismissed for lack of jurisdiction.
Strategic note — pre-payment judicial review
The Notice of Deficiency provides the only path to pre-payment judicial review for income tax deficiencies. If the 90-day window is missed, the deficiency is assessed and the taxpayer's only remaining judicial path is: pay in full → file claim for refund under IRC §7422 → wait for denial or 6 months under §6532(a) → sue in U.S. District Court or Court of Federal Claims. This is procedurally far more burdensome than Tax Court pre-payment review. Treat the 90-day window as a hard procedural deadline.
Section 7 · IRC §6501 — statute of limitations on assessment
The three-year default rule and its exceptions.
IRC §6501(a) establishes the default rule: the IRS must assess any tax within three years after the return was filed (or three years after the due date, whichever is later). After the three-year period expires, the IRS is barred from assessment.
| Exception | Authority | Condition |
|---|---|---|
| Six-year SOL | IRC §6501(e)(1)(A) | Omission of gross income exceeding 25% of reported gross income (Colony, Inc. v. Commissioner, 357 U.S. 28 (1958)) |
| Six-year SOL — Foreign | IRC §6501(e)(1)(A)(ii) | Omissions exceeding $5,000 attributable to foreign financial assets |
| No SOL — Fraud | IRC §6501(c)(1) | False or fraudulent return with intent to evade; IRS bears burden of clear and convincing evidence |
| No SOL — Failure to file | IRC §6501(c)(3) | No return filed; SFR under §6020(b) does not count as a 'return' for SOL purposes |
| Extension by agreement | IRC §6501(c)(4) | Form 872 (fixed expiration) or Form 872-A (open-ended) — practitioner should negotiate |
Strategic consideration on Form 872 extensions: Before agreeing, evaluate the procedural posture — has the examination essentially concluded with no adjustments? has the examiner gathered the evidence needed to issue a Notice of Deficiency? Practitioner options: shorter period, restriction to specific issues, Form 872 (fixed) over Form 872-A (open-ended), or outright refusal. Refusal forces the examiner to issue a Notice of Deficiency based on current evidence — which may be more aggressive but less defensible at Trial.
Section 8 · IRM 4.13 — the post-assessment reopening path
When the audit is over but the assessment is wrong.
Audit reconsideration under IRM 4.13 provides a procedural path to reopen a closed audit after assessment. Unlike Tax Court petition under §6213(a), audit reconsideration is not a statutory right — it is a discretionary procedure within IRM. To qualify: (1) have new information not previously considered; (2) demonstrate the original determination was incorrect; (3) have unpaid tax remaining on the assessment.
Per IRM 4.13.5, the request should include: identification of tax periods, specific identification of contested adjustments, new information not previously considered, supporting documentation, and explanation of why new information warrants reopening. The IRS may grant reconsideration fully, partially, or deny entirely. Alternative paths where IRM 4.13 is denied:
- →Doubt-as-to-liability OIC under IRC §7122 — Form 656-L (Offer in Compromise — Doubt as to Liability). Discretionary. Binding once accepted.
- →Claim for refund under IRC §7422 — Requires full payment. Statutory right to judicial review after IRS denial or 6 months under §6532(a).
- →Bankruptcy discharge — For older tax liabilities meeting §523(a)(1) requirements.
- →CSED expiration — If the Collection Statute Expiration Date under IRC §6502 has or will expire.
Section 9 · Practitioner pitfalls
Eight examination-stage errors to avoid.
Allowing the taxpayer to communicate directly with the examiner after Form 2848 is filed. After Form 2848, all communications must go through the representative.
Failing to document cooperation under §7491(a)(2). Maintain records of every IDR response, every interview, every document produced — this documentation supports §7491 at trial.
Producing more documents than the IDR requests. Each document produced is fair game for the examiner. Production should be tailored to what the IDR specifically requires.
Missing the 30-day window to file Appeals protest. After 30 days, the case proceeds to Notice of Deficiency, eliminating the more flexible Appeals settlement authority.
Missing the 90-day window to petition Tax Court. IRC §6213(a) is jurisdictional. Day 91 = no pre-payment review available.
Agreeing to Form 872 SOL extension without negotiation. Extension requests should be evaluated strategically — shorter periods, issue restrictions, or refusal may be appropriate.
Invoking Cohan without first establishing existence of the expense. Cohan allows estimation of amount only after existence is demonstrated. Pure speculation is not permitted.
Attempting Cohan estimation for IRC §274(d) categories. Travel, meals, entertainment, gifts, and listed property require strict substantiation that overrides Cohan. Recognize the categorical exclusion.
Practitioner FAQ
Citation Index — TRT-107
Statutes — IRC
I.R.C. § 274 / § 274(d) — Substantiation
I.R.C. § 6001 — Recordkeeping
I.R.C. § 6020(b) — Substitute for Return
I.R.C. § 6212 — Notice of deficiency
I.R.C. § 6213(a) — 90-day Tax Court petition
I.R.C. § 6501 — Limitations on assessment
I.R.C. § 6501(a) — Three-year default
I.R.C. § 6501(c)(1) — No SOL for fraud
I.R.C. § 6501(c)(3) — No SOL for failure to file
I.R.C. § 6501(c)(4) — Extension by agreement
I.R.C. § 6501(e) — Six-year SOL
I.R.C. § 7122 — Offers in compromise
I.R.C. § 7203 — Willful failure to supply information
I.R.C. § 7422 — Civil actions for refund
I.R.C. § 7491 — Burden of proof
I.R.C. § 7525 — Tax practitioner privilege
I.R.C. § 7602 — Examination of books and witnesses
I.R.C. § 7604 — Enforcement of summons
I.R.C. § 7609 — Third-party summonses
Cases
Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930)
United States v. Powell, 379 U.S. 48 (1964)
Colony, Inc. v. Commissioner, 357 U.S. 28 (1958)
United States v. LaSalle National Bank, 437 U.S. 298 (1978)
United States v. Stuart, 489 U.S. 353 (1989)
United States v. Clarke, 573 U.S. 248 (2014)
Williams v. United States, 245 F.2d 559 (5th Cir. 1957)
Coloman v. Commissioner, 540 F.2d 427 (9th Cir. 1976)
Sanford v. Commissioner, 50 T.C. 823 (1968)
Higbee v. Commissioner, 116 T.C. 438 (2001)
Villa v. Commissioner, T.C. Memo. 2023-155
Alvarado v. Commissioner, T.C. Memo. 2024-1
Internal Revenue Manual
IRM 4.10 (Examination of Returns)
IRM 4.13 (Audit Reconsideration)
IRM 8 (Appeals)
IRM 8.6.1 (Formal Written Protests)
IRM 25.1.1 (Fraud Handbook)
IRM 25.5.1 (Summons Authority)
Treasury Regulations
Treas. Reg. § 1.6001-1 (Records)
Treas. Reg. § 1.274-5T (§274(d) substantiation)
Treas. Reg. § 301.7602-1 (Examination authority)
This module is the practitioner reference.
The companion crisis page — for taxpayers who have received an IRS audit letter and need to act immediately — is at the services page.
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Module 8: CP504 / §6331(d) Notice Procedures (TRT-108)