John Kelshaw spent more than 40 years inside the IRS as a revenue agent, a group manager, and an appeals officer.
He knows what happens to your return before you ever hear from anyone.
On the Badran Tax podcast, he walked through the IRS audit process alongside our own former IRS agent and founder Amro Badran, EA.
At a Glance
Two former IRS agents with more than 60 years of combined agency experience, one of them on the Badran Tax team, explain how the IRS audit process actually works from selection through appeals.
- Being selected is not the same as being audited. An examiner can survey a case and close it before you are ever contacted.
- The IRS must prove income. You must prove deductions. That split drives the entire examination.
- Examiners are required to check your prior and subsequent year returns for the same issue.
- A 30-day letter opens appeals. Under $25,000 in tax and penalties, an informal protest is generally enough.
Who this affects: Individual taxpayers, self-employed filers, and small business owners facing an IRS audit notice.
Updated: September 2026
Who Is On This Episode
- John Kelshaw (guest), retired after more than 40 years at the IRS as a revenue agent, group manager, and appeals officer.
- Chris Nichols, EA (Badran Tax), a former IRS revenue officer with more than 20 years on the collections side, now an Enrolled Agent on our team.
- Amro Badran, EA (host), Managing Partner and founder of Badran Tax.
Between them, Kelshaw worked examinations and Chris worked collections. That covers both halves of what the IRS does after a return is filed.
How the IRS Audit Process Starts
Nobody at the IRS reads your return and takes a personal interest in you. The IRS audit process begins with a score.
Every filed return goes into the system and gets run against what Kelshaw calls a DIF score, short for Discriminant Information Function. It compares your return against every other return of the same type and looks for patterns and statistics that sit outside the expected range.
Land outside that range and the return gets pulled for possible examination. From there it goes either to an office audit or out to the field.
Office audit or field audit
The difference comes down to size and complexity.
Office audits generally involve smaller taxpayers. Think W-2 income, maybe a modest Schedule C, occasionally something unusual on Schedule A.
Field audits are where the bigger business issues live. Schedule C activity, partnerships, and the kind of return that takes a revenue agent to work. Within field work there is a further split between SB/SE, which covers small business and self-employed cases, and LB&I, which handles large business and international matters.
Selected is not the same as audited
This is the part almost nobody outside the agency knows.
Returns move from the service center to a group, where a manager decides who might work the case. Once it reaches an examiner, that examiner’s first move is not to look at your deductions.
“The first thing you always check is the statute of limitations, to make sure that you’re still entitled to audit the return and that there’s enough time on there.”
JOHN KELSHAW, RETIRED IRS REVENUE AGENT
Next comes the return itself. Some issues arrive pre-scored with a flag pointing at Schedule C or a Schedule K-1. The examiner reviews them and makes a judgment call.
And the call can go your way. Kelshaw describes a process called survey after assignment, where an examiner decides a case is not worth working, sends it back to the manager, and the matter ends there. No letter. No interview. Nothing.
✓ A Flagged Return Is Not an Audit
Returns get scored, reviewed, and frequently released without examination. The IRS also states plainly that selection for an audit does not suggest you made an error, and that filing an amended return or claiming a refund is not by itself a trigger.
The pre-audit: what the examiner knows before you speak
If the case is accepted, the examiner runs a pre-audit analysis before making contact.
That means reading the return, choosing which specific items to examine, and researching you. Kelshaw is blunt about how much that has changed across his career. Forty years ago it meant a trip to the library. Now it means finding a person’s business, their personal life, where they live, and sometimes an estimate of their net worth, all online.
Social media is fair game. Facebook, TikTok, anything that surfaces on a name search.
By the time the letter reaches your mailbox, the examiner already has a list of issues and a plan for the interview.
That plan is not fixed, though. During the initial interview the examiner can add issues or drop them based on what gets said in the room.
Kelshaw put it simply: a revenue agent has a lot of leeway on a case.
Chris from the Badran Tax team, spent more than 20 years at the IRS on the collections side before joining Badran Tax, confirmed the same pattern holds in his half of the agency. Exam calls it pre-audit analysis. Collections calls it initial analysis. The training is identical.
His summary was the part worth remembering: before you ever walk into that office, they have already done their homework on you.
Which cuts both directions, and that is the whole point of the next few sections.
What an IRS Auditor Examines: Income vs. Deductions
An IRS audit is not a general review of your finances.
It is a test of specific line items, and the two halves of the return are handled under completely different rules.
“Exam is responsible for proving the income. Taxpayers are responsible for proving the expenses.”
JOHN KELSHAW, RETIRED IRS REVENUE AGENT
Unexplained deposits are treated as income
If money landed in your account and you cannot show where it came from, the default position is that it is taxable.
Everyone says the same thing first: it was a loan. Kelshaw’s response is that a loan you cannot document is not a loan. Prove it, or prove another non-taxable source, or it becomes income.
He gave a concrete example of what proof actually looks like. A client says their mother sent them $2,000 a month. That can work. The examiner will want something in writing from the mother, notarized, plus bank records showing the withdrawals on her side.
Peer-to-peer payments have made this worse. Venmo and Zelle traffic between friends splitting dinner now shows up as a wall of deposits, and every one of them may need an explanation before an examiner will set it aside.
Ordinary, necessary, and reasonable
Business deductions are measured against three words from the Internal Revenue Code. Ordinary. Necessary. Reasonable.
The third one is where people get caught.
Kelshaw described the recurring conversation about luxury vehicles. Someone earning a few hundred thousand dollars wants to deduct a Bentley as a business vehicle. If they run a multi-billion dollar operation, maybe that holds. If they have a Schedule C selling handbags, it does not.
Amro Badran framed it in a way that lands: if you run a bakery, you do not need a Rolls-Royce, because most bakeries do not have one.
Reasonable is not measured against what you wanted. It is measured against the facts and circumstances of a business like yours.
Missing receipts are a problem, not a dead end
Records get lost. Kelshaw has heard the reasons: a flood, a car fire, and plenty of people who simply forgot.
A transaction can sometimes be reconstructed. If you can tie an expense to a bank withdrawal, a credit card statement, or a third party willing to confirm it, he has accepted that. If you paid a shop $2,000 and lost the receipt, go back to the shop and ask for another copy.
There is real discretion here, and he was candid about it.
“Do I have to allow it? The bottom line is no, because you didn’t substantiate it. Can I allow it? The answer is yeah, I could, depending upon everything else and the facts of the case.”
JOHN KELSHAW, RETIRED IRS REVENUE AGENT
Not every examiner will do that. He said so himself. But the discretion exists, and credibility is what unlocks it.
Chris explained where that discretion comes from. The Internal Revenue Manual is written with a lot of can and should rather than will, which leaves both revenue agents and revenue officers room to move. Standard allowances are starting points, not ceilings. A taxpayer who supplies reasonable support for a higher figure can sometimes get it.
His closing note on that was the same one Kelshaw kept returning to. The worst thing you can do with either of them is ignore them.
⚠ Reconstructing Is Not the Same as Creating
Getting a duplicate invoice from the vendor who did the work is reconstruction. Typing up an invoice yourself for work you cannot otherwise document is fabrication, and it changes the nature of the case entirely. Kelshaw’s advice on a missing receipt was to get it from the original source, not to make one.
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What Not to Do During an IRS Audit
Amro asked Kelshaw for five things a taxpayer should never do. His answers were immediate.
- Do not lie. Not about anything, not even something small.
- Do not ignore the notices. Open the mail. The IRS will not email you about an audit.
- Do not guess when you do not understand. Get professional help, or make an appointment at an IRS office if one is still open near you.
- Do not make things up. No invented documents, no invented numbers.
- Do not show up without records. Keep good records, and keep them organized by year and issue.
The first one carries more weight than people expect.
“The cover-up’s worse than the crime. Don’t lie about it. Because if you lie about it, now I really don’t care about that issue. I cared that you lied to me.”
JOHN KELSHAW, RETIRED IRS REVENUE AGENT
Once credibility is gone, the discretion described earlier goes with it. The examiner stops extending the benefit of the doubt on everything else, and small problems turn into large ones.
There is a sixth thing: do not talk too much
This came up repeatedly, and it is the mistake successful business owners make most.
You built something. You are proud of it. The examiner asks a question and you answer it, then keep going, explaining how the business works and what else you do.
Every one of those threads is a new place to look. Kelshaw described it directly: there may be something on your Schedule C he was never going to examine, and you telling him about it can lead to issues you did not want.
Answer the question that was asked. Then stop.
Attitude is part of the file
Asked whether a taxpayer’s demeanor affects the audit, Kelshaw said yes without hesitation. His approach to taxpayers was a line he used often: you may not like me, but you will respect me, and that goes both ways.
Being difficult with the person assigned to your case does not slow the case down. It just removes any reason for them to work with you.
Why Representation Changes the Conversation
A licensed representative holding a Form 2848 power of attorney can receive IRS correspondence, attend the examination, and handle the exchange on your behalf.
The practical value is narrower and more useful than most people assume. A representative can say four words you cannot comfortably say yourself: I’ll get back to you.
When a question touches a gray area, that pause is the difference between a verified answer and an improvised one. Kelshaw noted that representatives have every right to take a question back to the client and return with an answer.
He was also fair about the profession. Most representatives are honest, because it is not worth a license to lie to the IRS. And if a representative genuinely obstructs the process, the IRS can request a bypass to deal with the taxpayer directly, though there are significant rules to clear first.
There is a reason firms hire people who used to do this work. Someone who spent two decades assigning and closing IRS cases already knows what the person across the table needs, what they are allowed to accept, and which answers create new questions.
The team at Badran Tax handles IRS examinations and audit notices for individuals and businesses in all 50 states, with Enrolled Agents, CPAs, Tax Attorneys, and Former IRS Agents on staff, including Chris from this episode. A free consultation can clarify what your notice is actually asking for before you respond to it.
How Far Back the IRS Can Audit You
The general rule is three years from the date the return was due or the date it was filed.
But an audit of one year rarely stays in that year, and the reason is procedural rather than personal.
Under what Kelshaw called the package audit requirement, an examiner looking at your return is required to check the prior and subsequent year for the same issue. If he adjusts your 2024 Schedule C and the identical problem sits on 2023, he is required to go back and adjust it there too, and forward as well.
One questioned deduction becomes three years of questioned deductions. That is how a small examination becomes a large one.
| Situation | Time the IRS has to assess tax | Keep records |
|---|---|---|
| Return filed, income reported | 3 years from the filing date | 3 years |
| More than 25% of gross income omitted | 6 years from the filing date | 6 years |
| No return filed, or a fraudulent return | No limit | Indefinitely |
| Employment tax records | Varies by issue | At least 4 years |
Should you sign a statute extension?
When a year is running short on time, the examiner may ask you to extend the assessment period on Form 872.
Saying no does not make the issue disappear. Kelshaw explained the alternative: he can make the adjustments and issue a statutory notice immediately to protect the assessment. Refusing does not end the case, it accelerates it.
There is also a detail worth knowing before you decide. A case going to appeals generally needs at least one year remaining on the statute. If you want appeals and the clock is short, an extension may be the price of admission.
His own view was measured. Extend, but not indefinitely. Some extensions are open-ended and some run six months or a year, and an open-ended one can leave a case sitting while interest keeps running.
IRS Audit Appeals: What a Former Appeals Officer Says
When the examination report lands and you disagree with it, there is a sequence.
First, you discuss it with the examiner. Kelshaw said plenty gets resolved right there, item by item. If that fails, you can request a conference with the examiner’s manager, who reviews the file and takes a position.
Going above the manager to a branch chief or territory manager is theoretically possible. In more than 40 years he never saw it work.
The 30-day letter
If you still disagree, the IRS issues a 30-day letter, and the appeals window opens.
- $25,000 or less in proposed tax and penalties for the period: an informal protest, generally a short form such as Form 12203.
- More than $25,000: a formal written protest setting out the disputed issues, the law you are relying on, and why the adjustment should not apply.
If the dispute survives that, the IRS issues a statutory notice of deficiency, known as the 90-day letter. At that point you have 90 days to pay the tax or petition the United States Tax Court.
Is a smaller case worth appealing?
Amro asked the question most taxpayers actually have. Here is the exchange.
From the Episode
Amro Badran, EA: If somebody owes, let’s say, $10,000 to $12,000, is it a good idea to try to go through appeals?
“If it was me, if I owe anything, I would go to appeals, if I thought I had a legitimate chance to win. You’re never going to end up owing more tax if you go to appeals. You may owe some more interest, but you’ll never owe more tax.”
JOHN KELSHAW, RETIRED IRS REVENUE AGENT AND FORMER APPEALS OFFICER
That view carries weight because he worked as an appeals officer as well as a revenue agent. He has seen the file from both desks.
Two things to understand alongside it. Appeals reviews the issues already developed in the examination report, and penalties such as a substantial understatement penalty do not grow simply because you appealed. Interest is the variable, and it keeps accruing until the case closes or the balance is paid. On a large enough number, a long appeal has a real cost.
Whether an appeal makes sense in your case depends on the size of the adjustment, the strength of your records, and how long the process is likely to run.
Why appeals often goes better than examiners expect
Kelshaw addressed a complaint he heard often from other agents, which is that appeals simply gives cases away.
His answer was that two things are usually happening instead. Sometimes the taxpayer produces information that was never in the file. And often the case file itself was never documented properly, leaving the appeals officer with nothing to support the adjustment.
Appeals is independent by design. It cannot call the revenue agent for context, and it cannot go back to collections for more information either. It works from what is in the file and nothing else.
Chris put the consequence in one line.
“If you didn’t document it, it didn’t happen.”
CHRIS NICHOLS, EA, FORMER IRS REVENUE OFFICER,
– Badran Tax Professional
That rule was drilled into IRS employees about their own case files. It applies just as directly to yours.
Add the hazards of litigation, which is the government’s assessment of whether it would actually win in court, and a case the examiner thought was solid can look very different at the next level.
When the adjustment becomes a balance you owe
An agreed or upheld adjustment produces additional tax, plus penalties and interest.
Exam does not collect it. The case closes out through the group, moves to the service center, and the balance enters IRS collections as a separate matter with its own set of options. Eligible taxpayers may qualify for an installment agreement, penalty abatement, or another resolution path depending on their individual circumstances.
Warning Signs an Audit Is Going Wrong
Amro asked whether a taxpayer can tell when a case is heading toward criminal investigation. Kelshaw named two signals.
⚠ Two Things That Should Concern You
The examiner goes quiet. Calls stop being returned. Communication that was routine simply stops.
Two people show up instead of one. In Kelshaw’s description, the second person is usually a Criminal Investigation special agent.
If you ask an examiner directly whether you are under criminal investigation, do not expect an answer. He said he would never lie about it, but he would not confirm or deny either.
If either signal appears, that is the point to stop answering questions and speak with a representative.
Frequently Asked Questions
What triggers an IRS audit?
Returns are scored against similar returns using a DIF score, which flags filings that fall outside expected statistical patterns. Income reported on a W-2, 1099, or K-1 that does not appear on your return is matched automatically, and returns connected to another taxpayer already under examination can also be selected.
Does being selected mean I will definitely be audited?
No. An examiner reviewing an assigned case can decide it is not worth examining and return it to the manager, a step known as survey after assignment. The case closes without the taxpayer ever being contacted.
What is the difference between an office audit and a field audit?
Office audits generally involve smaller or less complex returns, often W-2 income with a modest Schedule C or Schedule A issue. Field audits involve larger business matters such as Schedule C activity and partnerships, and are worked by a revenue agent.
Will the IRS email or call me to start an audit?
No. The IRS notifies taxpayers of an audit by mail and does not open one by phone or email. Treat any call or email claiming to start an audit as a scam attempt.
Does the IRS look at my social media?
Yes. Pre-audit research routinely includes publicly available online information about a taxpayer’s business, lifestyle, and location, and that includes social media profiles that surface in a name search.
How far back can the IRS audit my tax returns?
Generally three years from the date the return was due or filed. That extends to six years if more than 25% of gross income was omitted, and there is no time limit if no return was filed or the return was fraudulent. Examiners are also required to check the prior and subsequent year for the same issue.
What if I lost the receipt for a business expense?
Ask the vendor for a duplicate. A transaction can also sometimes be accepted when it ties to a bank withdrawal, a credit card statement, or third-party confirmation. Creating the document yourself is a far more serious problem than not having it.
Can the IRS treat a bank deposit as income?
Yes. If you cannot show that a deposit was a loan, a gift, or another non-taxable source, it is generally treated as income until proven otherwise. Documentation such as a notarized statement and matching bank records is what moves that question.
Do I have to attend the audit myself?
No. A licensed representative holding a Form 2848 power of attorney, such as an Enrolled Agent, CPA, or tax attorney, can deal with the examiner on your behalf.
Should I sign a statute of limitations extension?
It depends. Refusing does not end the examination and can prompt the IRS to assess immediately, and a case going to appeals generally needs at least a year left on the statute. A limited extension is different from an open-ended one, so review Form 872 with a representative before signing.
Can I owe more tax by going to appeals?
Appeals reviews the issues developed in the examination report, and Kelshaw’s experience was that the tax and penalties do not increase because a taxpayer appealed. Interest continues to accrue while a case is open, so the length of the appeal has a cost. Outcomes depend on the facts of the individual case.
Does Badran Tax have former IRS employees on staff?
Yes. The firm’s team includes Former IRS Agents alongside Enrolled Agents, CPAs, and Tax Attorneys. Chris, who appears in this episode, spent more than 20 years at the IRS as a revenue officer before joining Badran Tax as an Enrolled Agent.
Am I responsible if my accountant made the mistake?
Yes. You signed the return, so the liability stays with you. A preparer can separately face due diligence and Circular 230 discipline. In limited situations involving a spouse’s undisclosed activity, innocent spouse relief may be available to eligible taxpayers.
Bottom Line
An IRS audit is a structured process with defined stages, and a great deal of it happens before you are ever contacted. The return gets scored, reviewed, researched, and narrowed to a list of specific issues.
What you control starts at the notice. Answer what was asked. Document what you claim. Do not fill silence with explanation, and do not fill gaps with paperwork you created.
If the number on the report is wrong, there is a process for that, and a former appeals officer’s advice was to use it when you believe you have a legitimate case.
If you are facing an IRS audit, Amro Badran, EA, Managing Partner of Badran Tax, and the firm’s licensed tax professionals are available to help. With over 40 years of experience resolving IRS and state tax problems, and a team that includes Enrolled Agents, CPAs, Tax Attorneys, and Former IRS Agents, Badran Tax works with taxpayers in all 50 states to identify options and pursue resolution.
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Sources & Helpful Resources
- Badran Tax Podcast: The IRS Audit Process with a Retired IRS Agent
- IRS: IRS Audits — Selection, Notification, and What to Expect
- IRS Topic No. 305: Recordkeeping and Periods of Limitations
- IRS: Preparing a Request for Appeals
- IRS Publication 5: Your Appeal Rights and How to Prepare a Protest
Amro Badran, EA, is the Managing Partner of Badran Tax,
With over 40 years of experience and accreditation as a Federal Enrolled Agent,
Amro Badran and his team of tax professionals specialize in helping individuals and businesses resolve complex IRS & state tax issues and controversies.
Experienced and Trusted Tax Resolution Firm based in New Brunswick, NJ.
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