619-795-8000San Diego Tax Audit Defense Attorneys
Respond Early to Limit Audit Scope and Financial Exposure
Audits are defined as much by scope as by substance. In San Diego, audit outcomes frequently hinge on how early responses shape the examiner’s understanding of records, operations, and consistency across years, long before any formal adjustments are proposed. A disciplined audit response plan can reduce unnecessary expansion, clarify the issues under review, and preserve appeal rights if the auditor proposes changes that do not match the facts or the law.
Dallo Law Group focuses on tax controversy matters, including audit defense for individuals and businesses. The team combines legal and accounting experience to build clear document packages, prepare clients for interviews, and address both federal and California exposure in a coordinated way.
For assistance with an IRS or FTB audit, call 619-912-0616.
IRS and California Tax Audit Authority and Statute of Limitations
Federal audits operate under statutory authority that allows the IRS to examine records, request information, and interview taxpayers. The IRS’s examination authority is set out in 26 U.S.C. § 7602. Under IRC § 7602, the IRS may examine relevant books and records and take testimony under oath, subject to statutory procedural protections and taxpayer rights. Time limits for assessment of additional federal tax generally run 3 years from when a return is filed or due (IRC § 6501(a)), extend to 6 years if there is a substantial omission of gross income (IRC § 6501(e)), and may be unlimited if no return was filed or if fraudulent intent is present unless otherwise provided.
California audits operate under the Revenue and Taxation Code. The Franchise Tax Board may examine and require information under authorities, including RTC § 19057 (general statute of limitations), RTC § 19058 (extended statute for omissions), and related regulations governing audit procedures. Because federal and state systems exchange information in many circumstances, an audit adjustment by one agency can lead to follow-up by the other. Audit defense should account for this overlap from the start.
Types of Tax Audits and What Each Audit Typically Covers
The audit format affects how intrusive the process becomes and what the auditor is likely to request. Correspondence audits typically involve a narrow set of issues handled by mail, such as substantiation for deductions or verification of income items. Office audits often cover broader issues and may include interviews. Field audits can involve visits to a home or business, and they may now also be conducted virtually. These audits can cover recordkeeping, internal controls, and operational questions, allowing the IRS to review both financial and procedural aspects of your business.
Identifying the audit type early helps set expectations for timing, documentation scope, and the likelihood of year expansion.
Common IRS and FTB Audit Issues for San Diego Taxpayers
Certain topics trigger frequent disputes because they involve large adjustments or require detailed substantiation. Income-matching issues are common, especially when Forms W-2 and 1099 do not align with reported income due to timing differences, corrections, or platform reporting. In some audits, the IRS or FTB may use indirect income reconstruction methods, such as bank deposit analysis, when records are incomplete. Taxpayers may rebut these methods by documenting transfers, loans, reimbursements, or other non-taxable sources.
Expense substantiation typically includes meals, travel, vehicle use, and home-office deductions, along with contractor payments and business-purpose documentation. Real estate issues often include basis, depreciation schedules, passive activity limits, and short-term rental classification questions. Digital assets and payment platforms add complexity because records may be spread across exchanges, wallets, and app histories.
Responding to IRS and FTB Information Document Requests
Audit outcomes often depend on how records are produced. Broad, disorganized production can create new issues and increase audit time and cost. Targeted production is usually more effective.
A strong document response package should include a clear index tracking each request and the documents provided, along with bank reconciliations that link deposits to reported income and highlight any non-income items. Ledger support connecting receipts and invoices to specific expense categories is essential, as are concise explanations for complex transactions such as property sales, refinancing, or business restructures. Consistent labeling throughout the package helps auditors review your documents efficiently without confusion.
Audit Interviews and Taxpayer Statements
Interviews can influence credibility and penalty exposure. Unprepared interviews increase the risk of incomplete answers, inconsistent explanations, or speculation that does not match records. Preparation should focus on reviewing documents first, identifying key timelines, and practicing accurate descriptions of business operations and recordkeeping.
In many cases, written submissions supported by records are more reliable than memory-based explanations. Where an interview is required or strategically useful, careful preparation reduces risk and improves consistency.
Audit Scope Expansion and Indirect Methods of Proof
Audits may extend beyond the original issues or tax years when additional periods are still within the applicable statute of limitations or when the taxpayer agrees to extend the assessment period. Expansion can occur when the auditor identifies patterns suggesting similar issues in other periods or concludes that the records do not accurately capture income.
When auditors distrust the books, they may use indirect methods such as bank deposit analysis or net worth methods. These methods can produce inflated results if they do not account for transfers, loans, reimbursements, or non-taxable sources. A defense strategy should identify and document non-income items early, then present a consistent reconciliation that addresses the auditor’s method.
Audit Results, Appeals, and Next Steps After a Proposed Adjustment
At the conclusion of an audit, there are typically three possible outcomes. First, a no-change result means the tax return remains as originally filed. Second, an agreed outcome occurs when the taxpayer accepts certain adjustments, often after providing additional documentation that helps narrow the points of disagreement. Third, an unagreed outcome arises when the auditor proposes changes that the taxpayer cannot accept.
Unagreed cases often advance to the formal appeals process, where the IRS Appeals office focuses on the strength of supporting evidence and the potential risks of litigation. Keeping a clear and comprehensive record during the audit phase strengthens the taxpayer’s position in Appeals and minimizes the chance of inconsistencies or disputes later.
If an assessment becomes final and a balance is owed, payment options may include installment agreements under 26 U.S.C. § 6159 or an offer in compromise under 26 U.S.C. § 7122, subject to IRS eligibility rules and financial review, subject to eligibility and the taxpayer’s financial circumstances.
Coordinating IRS and California Franchise Tax Board Audits
Federal and California audits often overlap in real-world impact. Federal changes may prompt California follow-up, and California positions may raise federal questions, especially regarding residency and sourcing. Coordinated defense focuses on maintaining consistency in documents, timelines, and explanations across agencies.
This coordination is particularly important for taxpayers with multi-state income, business entities, or substantial real estate activity, where differences in treatment can be legitimate but still require clear explanation.
Tax Audit Defense Frequently Asked Questions
Can the IRS or FTB audit additional years once an audit starts?
Yes. Additional years may be opened within applicable time limits when the auditor observes patterns suggesting the same issue recurs or believes a prior year has a similar risk.
What can be used when receipts are missing?
Bank statements, credit card records, invoices, calendars, mileage logs, and consistent bookkeeping entries may support reconstruction. The credibility of reconstruction depends on consistency and whether the method matches the scale of the activity.
Can a federal audit trigger a California audit?
Yes. Agencies often exchange information, and a federal adjustment can lead to state follow-up. Coordinated planning reduces the risk of inconsistency and prevents duplicate work.
How far back in time can the IRS go?
The IRS generally has three years from the date a return is filed or due to assess additional tax. This period can extend to six years if there is a substantial omission of income and may be unlimited if no return is filed or fraud is involved, unless otherwise limited by law.
Can penalties be challenged during an audit?
In many situations, yes. Penalty defenses often rely on documentation, reasonable cause analysis, and consistency of the record. These issues can be raised during the audit and, when needed, in Appeals.
Speak With Dallo Law Group at (619) 795-8000
A tax audit is manageable with a structured plan. We identify the notice type, define the issues, organize records, control communications, and prepare for possible appeals. Dallo Law Group represents San Diego taxpayers in IRS and Franchise Tax Board audits and builds defenses designed to limit scope, reduce unnecessary exposure, and preserve options.
To discuss an IRS or FTB audit notice with a San Diego tax audit defense attorney, call (619) 795-8000 for a confidential consultation.