If you understand what an IRS Revenue Agent does on paper, you understand half of an examination. The other half — the half that determines outcomes — is how they think. The mental model an agent brings to a case shapes which issues get developed, which positions get pushed, which compromises get accepted, and ultimately whether your audit closes for $0, for the full proposed adjustment, or somewhere in between.

This is the IRS audit playbook from inside. Not the procedural manual published in the Internal Revenue Manual — that document is publicly available — but the working mental framework that experienced Revenue Agents actually use as they prioritize cases, identify issues, and make the dozens of small decisions that aggregate into an examination’s outcome.

This article is informed by Kugelman Law attorney Otto Bosch, who served as a Revenue Agent in the IRS Global High Wealth Group within the Large Business and International (LB&I) Division before joining the firm in February 2026. For an introduction to what Revenue Agents formally do and how examinations are structured, see our companion piece on what an IRS Revenue Agent does. The article below picks up where that one leaves off — focused not on the structure of an audit but on the thinking behind it.

How Returns Get on the Radar in the First Place

Most taxpayers imagine return selection as a uniform process. In practice, it is a triage. The IRS receives more than 150 million individual returns each year, and the examination function can pursue only a small fraction of them. Every return that reaches a Revenue Agent’s desk has survived multiple rounds of selection — which means by the time the examination opens, someone in the IRS has already decided this return is worth investing real resources in.

That triage happens through several mechanisms — DIF scoring, related-return pickups, information matching, project initiatives, and others — which we covered in detail in our prior article. What matters for understanding the playbook is the agent’s mindset when a case is assigned: the agent assumes there is something to find. The selection process is statistical, not certain — but it is good enough that experienced agents do not approach examinations as fishing expeditions. They approach them as recovery operations: the system has flagged something, and the agent’s job is to figure out what.

This default assumption matters defensively. Many taxpayer responses during an audit are calibrated to “look cooperative” or “explain things,” on the assumption that the agent is starting from neutral. The agent is not starting from neutral. The agent is starting from “the system thinks something is here.” Responses calibrated to that posture are different from responses calibrated to a neutral counterparty.

How a Revenue Agent Builds a Case from Suspicion to Adjustment

An audit, viewed from the agent’s seat, is not a single inquiry. It is a layered case-building exercise. Each layer corresponds to a different mental task.

Stage 1: Pre-Contact Intuition

Before the agent ever issues a notice, they have read the return, the notes from selection, prior-year filings, and any third-party data already in IRS systems. They have formed a working hypothesis about what the case is — and a working list of issues they expect to develop. Experienced agents are usually right about the rough shape of the case before the first IDR ever leaves their desk.

What the taxpayer sees as the “first contact” is, from the agent’s perspective, the third or fourth phase of the case. Defense strategies that treat the opening conference as the start of the audit are already a step behind.

Stage 2: Issue Identification Through Documents

The first Information Document Request (IDR) is the agent’s tool for confirming or refuting the pre-contact hypothesis. They are not asking for documents because they want to read receipts. They are asking because they want to see whether reality matches their hypothesis — and where reality does not match, they want to see where the gaps are.

Experienced agents read taxpayer responses for three signals: what was produced, what was conspicuously absent, and what the production reveals about how the taxpayer keeps records. A neat, well-organized response signals a sophisticated taxpayer (and probably a careful preparer). A messy, partial, or contradictory response signals issues that are likely to multiply as the audit goes deeper. Both responses tell the agent how aggressively to invest in the case.

Stage 3: Position Development

Once issues are identified, the agent shifts from finding things to building something. A “position” is the IRS’s articulated theory for why a particular adjustment should be made — and the case file the agent builds to support that position is what survives into Appeals, into Tax Court, and into any settlement discussion.

This is where mental discipline starts to differentiate experienced agents from inexperienced ones. Strong positions are built on documents, third-party records, and clean factual narratives. Weak positions rely on inference, taxpayer statements, or agent-developed math that the taxpayer can re-do. A good defense team can usually tell within the first few exchanges which kind of position the agent is building.

Stage 4: Workpaper Construction and Supervisory Sign-Off

Workpapers are not the agent’s notes. They are the IRS’s case file — the formal record that managers, IRS Counsel, Appeals officers, and (if it gets that far) the Tax Court will rely on. Every position the agent develops must eventually be expressed in workpapers that withstand internal review.

This creates a meaningful internal filter. Positions an agent personally believes in but cannot reduce to a clean workpaper get dropped. Positions a manager pushes back on get refined or abandoned. Positions IRS Counsel will not support get withdrawn. The defense team that understands this filter — that knows which positions are likely to survive review and which are not — can apply pressure exactly where it is most likely to produce results.

The Internal Pressures That Shape Every Audit Decision

A Revenue Agent does not have unlimited time, and the IRS does not have unlimited capacity. Every audit operates under three quiet but constant pressures that shape decisions taxpayers rarely see.

Cycle time. Agents have caseload expectations. An audit that drags is an audit that pulls the agent away from their other cases — and from their performance metrics. This is one of the reasons that responsive, well-organized taxpayer cooperation often produces better outcomes than passive resistance: the agent’s incentive is to close the case efficiently, and giving them a clean path to closure is sometimes worth more than fighting every issue.

Review risk. Every aggressive position the agent advances will be reviewed — by the manager, by IRS Counsel, sometimes by Appeals. An agent who advances positions that get overturned at review damages their internal credibility. This is why agents are often reluctant to push aggressive penalty positions, civil fraud allegations, or controversial legal theories unless the workpapers genuinely support them. Recognizing the threshold at which an agent will or will not commit to a position is one of the highest-leverage insights a defense team can have.

Specialty referrals. Complex examinations frequently involve specialists — international examiners, computer audit specialists, financial product specialists, valuation engineers. Bringing in a specialist takes time and case management. Agents weigh the value of escalation against its cost. A defense that signals a serious specialist would face credible counter-arguments may shift the case toward narrower issues that the agent can resolve without bringing in additional resources.

What Agents Look For That Taxpayers Don’t Recognize

Some of the most valuable inside-the-IRS knowledge is also the most counterintuitive. The signals below are things Revenue Agents are trained to read but that taxpayers and unprepared representatives often miss entirely.

• Lifestyle versus reported income. Significant gaps between what the return shows and what the taxpayer’s life suggests — homes, cars, travel, business interests visible on social media — are flags agents notice early. The IRS has access to public records and increasingly to other data streams that make these comparisons routine.
• Round numbers. Returns full of round numbers (exactly $5,000 in expenses, exactly $10,000 in donations) signal estimation rather than documentation. Agents notice this and adjust the audit accordingly.
• Inconsistencies across years. A line item that appeared in 2022 but vanished in 2023 — or a deduction that scaled non-linearly with income — invites questions. Agents do not always pursue these, but they note them, and they shape the case file.
• Related-party transactions without arms-length characteristics. Loans between entities with no documented terms, payments to family members for unspecified services, or rent to controlled entities at non-market rates draw immediate attention.
• Cash-intensive businesses with thin paper trails. Restaurants, salons, contractor businesses, and other cash-heavy operations get scrutinized differently. Agents are trained to test reported gross receipts against industry norms and against bank deposits.
• Crypto and digital asset patterns. Returns showing digital asset activity without corresponding income items, or returns answering “no” to the digital asset question while exchange data shows otherwise, are flagged. Our article on IRS cryptocurrency audits explores this pattern in detail.
• Suspiciously timed amendments and late filings. Returns amended after the IRS opened an audit, or returns filed unusually late after notices, draw heightened attention. Agents note timing.

The pattern in all of these: agents are reading the return for signals about the taxpayer, not just about the numbers. Defense strategies that focus only on document production miss this dimension entirely.

How Agents Decide Whether to Push or Fold on an Issue

One of the most useful insights from inside the IRS is the recognition that agents do not push every issue to its limit. Many issues are noticed, considered, and quietly dropped — because the cost-benefit math does not work for the IRS.

The internal calculus on a given issue weighs:

• The dollar amount at stake
• The strength of the documentary support
• The likelihood the position survives Appeals or Tax Court
• The agent’s confidence in the legal theory
• The amount of additional development needed
• Whether the issue connects to other issues already being developed

Issues with strong documentary support, clear law, and meaningful dollars tend to be pushed. Issues with weak documentary support, ambiguous law, or trivial dollars tend to be dropped — even if the agent personally suspects the taxpayer’s position is wrong. The IRS does not pursue every theoretical adjustment. It pursues the ones that pencil out.

A sophisticated defense uses this. By making strong positions stronger and exposing weak positions early, the defense can shift the agent’s calculus on a case. Issues that were borderline tend to fall toward dropping. Issues that were marginal tend to settle on terms favorable to the taxpayer.

When the Audit Plays By Different Rules

Most of the playbook described above applies to standard examinations. There are categories of audits where the rules shift, and recognizing the shift is critical.

Eggshell audits — civil examinations with potential criminal implications — operate under an entirely different set of rules. The agent’s job is no longer to develop adjustments efficiently but to develop the record carefully, with an eye toward potential referral to IRS Criminal Investigation. Cooperation strategies that make sense in a routine audit can be catastrophic in an eggshell audit.

Global High Wealth and LB&I enterprise audits are also their own world. Cycle-time pressures are different, specialist resources are abundant, and the audit considers the entire web of related entities and transactions rather than the individual return. The mental model a Global High Wealth team brings to a case is integrated and patient in ways most taxpayers do not expect.

Project-driven examinations — audits opened as part of a focused enforcement initiative — also play differently. The agent has trained on the project’s target issue, has examined other taxpayers in the same project, and has internal guidance on what positions to develop. A defense that does not recognize the project’s contours will misread the agent’s posture entirely.

In each of these scenarios, defending without inside-the-IRS perspective is defending blind.

What This Means for Defense Strategy

The aggregate of everything above has a single practical implication for taxpayers under audit: the most consequential decisions in your audit are not the visible ones. They are the unseen ones — the agent’s pre-contact hypothesis, the position-building decisions in the workpaper file, the internal review pressures, the issue-by-issue cost-benefit calculations, and the specific signals the agent is reading from your responses that you do not realize you are sending.

This is what an IRS-insider perspective on the defense team actually changes. With Otto Bosch’s experience inside the IRS Global High Wealth Group and Alex Kugelman‘s nearly two decades of federal tax controversy litigation, Kugelman Law approaches every audit defense matter with a working understanding of the playbook on the other side of the table — and a credible litigation backstop if the case cannot be resolved administratively. We covered the full team capability in our article on why a former IRS revenue agent attorney changes audit defense.

Representative outcomes from the firm’s audit defense practice include a $365,000 tax debt reduced to a zero-dollar liability, a multi-year audit and non-filing matter resolved with minimal payment, and ten years of unfiled returns brought into compliance with a successful outcome. Results depend on specific facts. Past results do not guarantee future outcomes.

If you would like to discuss your IRS or FTB matter and how the firm’s combination of inside-the-IRS perspective and federal tax litigation experience can shape your defense, see our tax help resources or contact the firm directly.

Frequently Asked Questions

How do IRS auditors decide which issues to focus on?

Revenue Agents prioritize issues based on a combination of dollar magnitude, strength of documentary support, clarity of the legal theory, and the cost in agent time required to develop the position. Issues that are well-supported, technically clean, and material to the case tend to be pushed. Issues that are weak, ambiguous, or trivial tend to be quietly dropped — even when the agent personally suspects the taxpayer’s position is incorrect.

What red flags do IRS auditors look for?

Common signals include lifestyle inconsistent with reported income, returns full of round numbers, year-over-year inconsistencies in reported items, related-party transactions without arms-length characteristics, cash-intensive businesses with thin documentation, digital asset activity that does not align with reported income, and suspiciously timed amended or late-filed returns.

Can an IRS auditor decide to drop an issue mid-audit?

Yes. Issues that look promising in pre-contact analysis frequently get dropped during fieldwork as documents and explanations come in. Conversely, issues that were not initially identified can emerge from the development process. Audit scope is not fixed at the opening conference — it evolves as the case develops.

What does it mean when an IRS audit closes “no change”?

A no-change closing means the agent did not develop adjustments and the return is accepted as filed. This outcome is more common than many taxpayers assume. It occurs when the issues identified at selection do not survive document review, when the taxpayer’s documentation is strong, or when the cost-benefit math on the available positions does not justify pursuing them.

How do I know if my IRS audit is becoming an eggshell audit?

There are signals — agent questions that focus on knowledge, intent, and willfulness rather than documentation; involvement of specialized fraud or referral-related personnel; specific timing patterns in document requests; and sudden agent reluctance to discuss the case. Recognizing these signals reliably requires controversy experience. If you have any reason to suspect criminal exposure, attorney representation is essential and should be retained before any further communication with the IRS.

Speak With Kugelman Law

If you are facing an IRS audit, controversy, or complex federal tax matter — or if you suspect the IRS is preparing to open one — schedule a paid privileged consultation with Kugelman Law. Call (415) 968-1780 or visit our contact page. All consultations are fully protected by attorney-client privilege.

When the IRS opens an examination of your return, the first practical question is who you should hire to defend it. Most taxpayers default to their CPA — and for many routine examinations, that is the right call. Some hire a tax attorney. A few hire an Enrolled Agent. And a small number ask the more sophisticated question: should my defense team include someone who has actually worked as an IRS Revenue Agent?

This article walks through the differences honestly. Tax attorney vs CPA for IRS audit defense is not always the right framing. For some matters, a CPA is exactly what is needed. For others, only a tax attorney can do what the situation requires. And for the most consequential cases, the right answer is a defense team that combines both legal authority and the inside-the-IRS perspective of a former Revenue Agent.

This is how Kugelman Law structures its audit defense practice, and the rest of this article explains why.

The Three Professionals Who Can Represent You Before the IRS

Federal regulations recognize three categories of professionals authorized to represent taxpayers before the IRS:

Tax Attorney

A licensed lawyer admitted to one or more state bars who practices in tax. The defining attributes are legal training, attorney-client privilege, the ability to litigate in court — including U.S. Tax Court, U.S. District Court, and the Court of Federal Claims — and the authority to provide legal advice. Within tax law, attorneys vary widely in specialization. Some focus on planning and transactions; others focus on controversy and litigation. For audit defense, the relevant subspecialty is tax controversy.

Certified Public Accountant (CPA)

A licensed accountant who has passed the Uniform CPA Examination and met state licensing requirements. CPAs are tax preparation, accounting, and auditing professionals. They can represent clients before the IRS in many circumstances. The defining attributes are accounting depth, fluency in financial statements and tax returns, and — for many CPAs — a long-running client relationship built around return preparation.

Enrolled Agent (EA)

A federal credential granted by the IRS itself. Enrolled Agents have either passed the Special Enrollment Examination (a three-part exam covering individual taxation, business taxation, and representation) or qualified through prior IRS employment. EAs have unlimited practice rights before the IRS. Their defining attributes are tax-specific expertise and a federal credential focused entirely on tax matters.

A practitioner can hold more than one of these credentials. Many tax attorneys are also CPAs. Some, like Kugelman Law’s Otto Bosch, are both attorneys and Enrolled Agents — and bring direct prior experience as IRS Revenue Agents.

What Each Professional Can and Cannot Do

The differences become consequential when you look at the specific things each professional can and cannot do during an audit.

All three can represent you before the IRS in audits, appeals, and collections matters. All three can communicate with examiners on your behalf, respond to Information Document Requests, attend conferences, and negotiate settlements. For many routine examinations, this scope of authority is sufficient.

Only attorneys can:

• Provide formal legal advice, including opinions on legal questions
• Litigate cases in federal court — including U.S. Tax Court, U.S. District Court, and the Court of Federal Claims (CPAs and EAs may litigate in U.S. Tax Court only after passing the Tax Court Examination, and even then their authority is limited to that single court)
• Maintain full attorney-client privilege over communications about your case
• Apply privilege protection to work product developed in anticipation of litigation
• Handle matters with parallel criminal exposure within the privileged framework needed to protect the client

That last point — privilege — is the single most consequential difference, and it deserves its own discussion.

The Critical Difference: Attorney-Client Privilege

Communications with a tax attorney are protected by attorney-client privilege when they meet the conditions privilege requires. That means the IRS cannot compel the attorney to disclose what the client told them, and in most circumstances cannot compel the attorney’s notes, analyses, or work product developed in anticipation of litigation.

Communications with a CPA or EA do not have the same protection. The Internal Revenue Code provides a limited “tax practitioner privilege” under Section 7525 — but it is significantly narrower than attorney-client privilege. Section 7525 privilege does not apply to criminal matters. It does not apply to written tax shelter advice. It does not apply in state proceedings. And courts have generally read it more narrowly than many taxpayers expect.

The practical implication is this: if there is any meaningful chance that an examination has criminal implications — which is true in eggshell audits, in cases involving large unreported income, in cases with foreign account issues, and in cases involving cryptocurrency where the digital asset question was answered incorrectly — communications with a CPA or EA are not safely privileged. Communications with an attorney are.

This is why sophisticated tax controversy practice often involves a “Kovel arrangement” — a structure in which a CPA is engaged by the attorney rather than directly by the client, so that the CPA’s work falls within the attorney’s privilege. That structure is appropriate in many controversy matters. It is also a structure that requires an attorney at the center of the engagement.

When You Need a Tax Attorney (and When You Don’t)

Not every IRS audit requires an attorney. A correspondence audit on a missing 1099 or an arithmetic error generally does not. A modest Schedule C examination focused on documentation of business expenses generally does not. For these matters, a CPA or EA — particularly one familiar with the client and the return — is often the right professional to handle the response.

A tax attorney becomes the appropriate choice when one or more of the following is true:

• The dollar amounts are significant. Audits with potential exposure in the high five figures and above generally justify the additional cost of attorney representation.
• The technical issues are complex. Partnership and S-corporation audits, related-party transactions, basis disputes, and characterization questions benefit from legal analysis as well as accounting analysis.
• There is parallel criminal exposure. Eggshell and reverse-eggshell audits require attorney representation for privilege reasons alone.
• Foreign accounts are involved. FBAR penalties, Form 8938 issues, and the willfulness analyses that drive offshore disclosure outcomes are legal questions with severe penalty consequences.
• Cryptocurrency is involved. IRS cryptocurrency audits frequently combine unreported income, foreign exchange use, and digital asset question issues that benefit from legal analysis.
• The case is likely to escalate. Matters that may proceed to Appeals or to U.S. Tax Court litigation need an attorney engaged from the start, because the record built during the examination is what the case is ultimately decided on.
• You disagree fundamentally with the IRS. Where the dispute is not about documenting items but about legal positions the IRS is asserting, attorney involvement is generally appropriate.
• Penalties are aggressive. Civil fraud, substantial understatement, and other significant penalties often require legal defense beyond accounting fluency.

The Often-Overlooked Question: Has Anyone on Your Team Worked Inside the IRS?

Most discussions of tax attorney versus CPA stop at the comparison above. There is a further layer that tends to be invisible from outside the controversy field: the value of having someone on the defense team who has actually worked as an IRS Revenue Agent.

A former Revenue Agent attorney brings something neither a tax attorney nor a CPA can bring on their own — direct, internal experience with how the IRS actually conducts examinations. This includes:

• Knowing what an agent’s first IDR will likely ask for and what the second and third will probably address
• Recognizing when an agent is genuinely committed to a position versus when the agent is fishing
• Understanding the internal review architecture — supervisor review, IRS Counsel coordination, fraud referral pathways — that filters every meaningful decision an agent makes
• Reading the difference between a routine audit and an eggshell audit early enough to adjust strategy
• Building a defense record that anticipates what the IRS will need at Appeals or in Tax Court

This is the perspective Otto Bosch brings to Kugelman Law. Before joining the firm in February 2026, Otto served as a Revenue Agent in the IRS Global High Wealth Group within LB&I — the unit that audits the most complex returns of the wealthiest U.S. taxpayers. He is also an Enrolled Agent and holds an LL.M. in Taxation. We covered this layered advantage in detail in our article on why a former IRS revenue agent attorney changes audit defense, which complements our broader explanation of what IRS Revenue Agents actually do inside an examination.

For taxpayers facing significant IRS examinations, this third dimension — beyond “attorney versus CPA” — is often the deciding factor in case outcomes.

How Kugelman Law’s Team Combines These Capabilities

Kugelman Law is structured deliberately around the capabilities a serious controversy matter actually requires.

Founder Alex Kugelman brings nearly two decades of federal tax controversy experience, including litigation in U.S. Tax Court and U.S. District Court. He is a member of the State Bar of California, served as San Francisco Chair of the Federal Bar Association’s Tax Division in 2018, and is a nationally recognized cryptocurrency tax attorney featured on the Bitcoin.tax podcast and The Mark Milton Show. The litigation capability matters because the credible threat of taking a case to court is what gives administrative resolution its leverage.

Otto Bosch brings the inside-the-IRS perspective from his time as a Revenue Agent in the Global High Wealth Group, plus additional technical depth from his prior role at KPMG’s Washington National Tax practice. He holds an LL.M. in Taxation with a focus on Partnership Tax and is an Enrolled Agent.

The combination — attorney + IRS-insider + crypto fluency + federal litigation capability — is what most controversy practices simply cannot offer. CPAs and EAs working alone cannot provide privilege or court access. Tax attorneys without IRS experience operate without the insider perspective. Firms with neither litigation experience nor inside-the-IRS background are missing both ends of the controversy spectrum.

Representative outcomes from the firm’s audit defense practice include a $365,000 tax debt reduced to a zero-dollar liability, a multi-year audit and non-filing matter resolved with minimal payment, and ten years of unfiled returns brought into compliance with a successful outcome. Results depend on specific facts. Past results do not guarantee future outcomes.

A Practical Decision Framework

For taxpayers trying to decide who should handle their IRS audit, a practical framework:

1. For routine correspondence audits and simple documentation matters — your existing CPA or EA is often the right choice. The cost-benefit analysis favors them.
2. For substantive examinations involving real money or complex issues — engage a tax controversy attorney. The privilege protection alone justifies the choice in many cases.
3. For high-stakes examinations — Global High Wealth, LB&I, multi-year non-filing, foreign accounts, cryptocurrency, or parallel criminal exposure — engage a tax controversy firm whose team includes both senior litigation experience and former IRS-insider perspective.

The decision is not always either/or. Many engagements involve attorney-led representation with a CPA performing supporting accounting work under the attorney’s privilege through a Kovel arrangement. The point is that the highest-stakes cases benefit from legal authority, privilege protection, litigation capability, and inside-the-IRS perspective — and the question is whether your defense team has them.

Frequently Asked Questions

Can a CPA represent me in an IRS audit?

Yes. CPAs have authority to represent taxpayers before the IRS in audits, appeals, and collections matters. For many routine examinations, CPA representation is appropriate. The limitations of CPA representation become significant in cases with criminal exposure, in matters likely to require litigation, and in matters where attorney-client privilege protection is needed.

Do I have attorney-client privilege with a CPA?

Not in the same way you do with an attorney. The Internal Revenue Code provides a limited “tax practitioner privilege” under Section 7525, but it is substantially narrower than attorney-client privilege. It does not apply in criminal matters, in tax shelter advice, or in many state proceedings. For matters where privilege is important, attorney representation is generally needed.

Is a tax attorney more expensive than a CPA?

Generally yes — hourly rates for tax controversy attorneys are higher than CPA rates. Whether the higher cost is justified depends on the matter. For complex, high-stakes, or potentially adversarial cases, attorney involvement frequently produces better outcomes that more than offset the cost difference. For routine matters, a CPA may be the more efficient choice.

What is an Enrolled Agent and how do they fit in?

An Enrolled Agent is a federal credential granted by the IRS. EAs have unlimited practice rights before the IRS and focus exclusively on tax matters. They can represent taxpayers in audits, appeals, and collections. They do not have legal training or attorney-client privilege, and their authority to litigate is limited. Some practitioners — like Kugelman Law’s Otto Bosch — are both attorneys and Enrolled Agents.

Should I keep my CPA involved if I hire a tax attorney?

Often, yes. Many controversy engagements work best when the attorney leads representation and the CPA contributes specialized accounting work — particularly on complex returns, basis reconstructions, and ongoing compliance. The CPA’s work can be performed under the attorney’s privilege through a Kovel arrangement when appropriate. Coordinated team representation is frequently the optimal structure.

Speak With Kugelman Law

If you are facing an IRS audit, controversy, or complex tax matter and want to understand how the right combination of legal authority, IRS-insider perspective, and federal litigation capability can shape your defense, schedule a paid privileged consultation with Kugelman Law. Call (415) 968-1780 or visit our contact page. All consultations are fully protected by attorney-client privilege.

An IRS cryptocurrency audit is no longer a theoretical concern for active traders, NFT participants, DeFi users, or anyone who has held digital assets through one of the bull cycles of the past decade. It is an active risk. And the agents conducting these examinations are increasingly trained, equipped, and supported by the agency’s data resources to develop adjustments that can carry into six and seven figures of assessed tax, penalties, and interest.

This article explains what an IRS cryptocurrency audit actually looks like from the inside — how returns are selected, what agents are trained to examine, what data the IRS already has, and where defense actually matters. The perspective is informed by Kugelman Law attorney Otto Bosch, a former Revenue Agent in the IRS Global High Wealth Group within the Large Business and International (LB&I) Division, paired with founder Alex Kugelman‘s nearly two decades of federal tax controversy experience and one of the country’s earliest dedicated cryptocurrency tax practices.

How the IRS Is Building Its Crypto Enforcement Capability

Understanding an IRS cryptocurrency audit starts with understanding what the IRS now knows — and how it knows it.

Exchange data through John Doe summonses. The IRS has used John Doe summonses to compel major U.S. cryptocurrency exchanges to produce account holder data, including identification information and transaction histories. The summonses served on Coinbase, Kraken, Circle, and others have produced datasets covering significant numbers of U.S. taxpayers. That data sits in IRS systems and is matched against filed returns.

Form 1099 reporting and digital asset broker rules. Expanded broker reporting rules require digital asset platforms to report transaction information directly to the IRS on information returns. The result is a steadily improving stream of third-party data that the IRS uses to identify reporting gaps, in much the same way W-2s and traditional 1099s are used.

The Form 1040 digital asset question. Every Form 1040 filed since 2019 has required the taxpayer to answer a yes-or-no question about digital asset activity. Answering that question incorrectly — particularly answering “no” when the taxpayer had reportable activity — is a fact the IRS pays attention to. It can support penalty positions, including in some circumstances civil fraud.

Blockchain analytics partnerships. The IRS works with blockchain analytics firms — Chainalysis among them — to trace transactions across the public blockchain, link wallet addresses to identified taxpayers, and reconstruct activity that occurred outside reporting exchanges. The blockchain is public; identifying who controls a particular address is the harder part, and the analytics tools the IRS has access to are increasingly capable of doing it.

Operation Hidden Treasure and successor initiatives. Beginning with Operation Hidden Treasure, the IRS has run dedicated training and enforcement programs focused on cryptocurrency. Revenue Agents working these cases receive specialized training. Specialized criminal investigation resources within IRS-CI focus on digital assets. And large-case examinations within LB&I increasingly include cryptocurrency-specific issue identification.

The cumulative effect is that an IRS cryptocurrency audit in 2026 is not the same examination it was five years ago. Agents arrive with significantly more information than taxpayers tend to assume.

Who Gets Selected for an IRS Cryptocurrency Audit

Crypto returns reach Revenue Agents through several paths, and the path tells the defense team something about the IRS’s interest in the case. As a general matter — and consistent with how returns are selected for examination across the IRS, which is covered in more depth in our guide to what IRS Revenue Agents do — crypto cases tend to be selected through:

• Information matching mismatches. When exchange-reported data shows reportable activity that does not appear on the taxpayer’s return, the gap is flagged for review. This is one of the most common entry points for crypto examinations.
• The Form 1040 digital asset question. Returns answering “no” while exchange data shows otherwise are high priority. So are returns answering “yes” with implausibly small reported activity relative to known holdings.
• John Doe summons follow-up. Account data produced through John Doe summonses is reviewed against filed returns; significant unreported activity surfaces examination candidates.
• Project initiatives. The IRS has run and continues to run focused enforcement projects on specific crypto issues — high-volume traders, NFT activity, DeFi transactions, and offshore exchange usage among them.
• Related-return pickups. When one taxpayer’s audit surfaces crypto activity involving counterparties — peer-to-peer transactions, partnership distributions of digital assets, business payments in crypto — the related taxpayer’s return can be opened for examination.
• Whistleblower referrals. The IRS Whistleblower Program receives, and acts on, referrals involving crypto activity.

The path matters because it shapes the examination. A mismatch-driven case usually starts narrow and follows the data. A project-driven case is concentrated on the project’s target issue. A John Doe summons follow-up may already include significant data the agent has reviewed before contacting the taxpayer.

What Revenue Agents Are Trained to Look For in a Cryptocurrency Audit

An IRS cryptocurrency audit covers a defined set of issues that Revenue Agents are trained to develop. Knowing what those issues are — before the first Information Document Request lands — is one of the most important advantages a defense team can bring to the table.

Unreported Disposition Income

The most common issue is straightforward: dispositions that should have been reported as taxable events were not. Every sale, trade, and use of cryptocurrency to purchase goods or services is generally a taxable event, and the gain or loss is calculated against the asset’s basis. Crypto-to-crypto trades are taxable. Spending Bitcoin on a meal is taxable. Swapping ETH for an NFT is taxable. Many taxpayers — and even some preparers — have historically missed these dispositions, and reconstructing them is the heart of most crypto examinations.

Basis and Holding Period Reconstruction

Once dispositions are identified, the next question is basis. What did the taxpayer pay for the asset, when, and how is the cost allocated across multiple acquisitions? Crypto basis is uniquely difficult because it spans years, exchanges, wallets, and methods of acquisition. Agents trained on these cases know that taxpayer-prepared crypto records are often incomplete, that exchange CSV exports do not always reconcile cleanly, and that an undocumented basis position will be challenged. Holding periods — long-term versus short-term — drive significant differences in tax rate and are scrutinized.

Income From Mining, Staking, Airdrops, and Hard Forks

Income items that arise outside of dispositions are a separate audit category. Mining and staking rewards are generally taxable as ordinary income at fair market value when received, and they create a basis carried into any later disposition. Airdrops and hard forks have IRS guidance — including Revenue Ruling 2019-24 — that agents apply. These items are routinely under-reported, and they are routinely raised in cryptocurrency examinations.

NFT-Specific Issues

Non-fungible tokens introduce their own audit issues: characterization questions (collectible versus capital asset versus inventory), royalty income, gas fees, the treatment of mints, and platform-specific reporting peculiarities. Revenue Agents working NFT tax compliance matters are trained on the issues that NFT activity tends to produce — and they tend to produce a lot of them.

DeFi Activity and Wrapped Tokens

DeFi protocols — lending, liquidity provision, yield farming, wrapping and unwrapping tokens — generate transactions that may or may not be taxable events depending on facts and characterization, and the area is technically nuanced. Agents look for the obvious — unreported income from yield farming and lending — and increasingly for the more sophisticated — characterization of liquidity pool entries and exits, and the tax consequences of wrapping transactions.

Foreign Exchange Use and FBAR Exposure

Use of foreign-domiciled cryptocurrency exchanges raises issues that go beyond the tax return itself. Foreign accounts holding cryptocurrency may trigger FBAR (FinCEN Form 114) and Form 8938 reporting obligations, and the IRS’s position on these obligations has evolved. Penalties for non-filing of FBARs and information returns can be severe and are independent of any income tax owed. Resolution typically involves streamlined offshore procedures, delinquent FBAR submissions, or other voluntary disclosure pathways depending on the facts.

The Form 1040 Digital Asset Question

Agents are specifically trained to examine the digital asset question on Form 1040. A “no” answer in a year of significant activity is a finding agents log and use — supporting accuracy-related penalties, in appropriate cases supporting fraud penalties, and in the most serious cases supporting referrals to IRS Criminal Investigation.

Pig Butchering and Investment Scam Losses

A growing area of crypto audit activity involves taxpayers who lost significant funds to pig butchering and similar crypto investment scams. The tax treatment of these losses is technical, the documentation challenges are significant, and the available deductions are narrower than many taxpayers and preparers assume. Audits in this area frequently turn on whether the taxpayer can substantiate the loss and characterize it correctly.

The Anatomy of an IRS Cryptocurrency Audit

Once an examination opens, a cryptocurrency audit follows the general arc of any IRS examination — but with crypto-specific document requests and analytical steps layered in. The early stages are often the most consequential.

The opening Information Document Request typically asks for, among other things: a complete list of every exchange and wallet ever used; CSV exports or transaction histories from each exchange; lists of self-custody wallet addresses and their public keys or transaction logs; mining and staking records; any tax software output (such as files from CoinTracker, Koinly, ZenLedger, or similar) used to prepare the return; and any third-party reports received. The first IDR is broad by design. It is the agent’s tool for understanding the universe of activity before drilling into specific issues.

How that first IDR is responded to often determines how the audit proceeds. Volunteering wallets the IRS does not appear to know about, providing reconciliations that reveal previously undisclosed activity, or producing records that contradict the return are decisions that should never be made without strategic review. They cannot be unmade later.

From there, the agent reconciles taxpayer-produced data against exchange records the IRS has received independently, runs blockchain analytics where appropriate, and develops issues. Specialists may be brought in for technical questions. The case proceeds through the same internal review and managerial sign-off architecture that governs any IRS examination, and closes with either a no-change, an agreed adjustment, or a Revenue Agent’s Report and 30-day letter setting up Appeals.

Why Crypto Audits Are Especially High-Stakes

An IRS cryptocurrency audit can quickly produce assessment exposure that surprises taxpayers. Several factors compound:

• Multi-year scope. Crypto audits frequently look at multiple years simultaneously. The statute of limitations is generally three years, but it extends to six years for substantial omissions and is unlimited for fraud or non-filed returns.
• Penalty stacking. Accuracy-related penalties (typically 20%) can be combined with FBAR penalties (which can reach the greater of $10,000 or 50% of account value per willful violation), Form 8938 penalties, and in serious cases civil fraud penalties (75%).
• Basis disputes that move large numbers. An undocumented basis position can convert what the taxpayer considered a modest gain into a much larger one. Where the taxpayer assumed $100,000 in basis and cannot prove it, the agent may treat basis as $0 — and the assessment moves accordingly.
• Foreign account exposure. Use of offshore exchanges or foreign-held wallets can trigger reporting obligations entirely separate from the income tax — with their own penalty regimes that can dwarf the underlying tax.
• Eggshell and reverse-eggshell concerns. Where significant activity was unreported and the digital asset question was answered “no,” civil examinations carry the possibility of referral to IRS-CI. Reading that risk correctly is critical.

This combination of factors is why a former IRS revenue agent attorney on the defense team is particularly valuable in cryptocurrency examinations. The technical issues are unfamiliar to most general tax practitioners. The risks compound quickly. And the IRS’s training, tooling, and posture in this space continue to evolve in ways most taxpayers cannot see from the outside.

How Kugelman Law Defends IRS Cryptocurrency Audits

Kugelman Law has defended cryptocurrency tax matters since the practice area existed. Alex Kugelman has been featured nationally on the Bitcoin.tax podcast and The Mark Milton Show discussing IRS digital asset enforcement, and he has built one of the country’s earliest dedicated cryptocurrency accounting and IRS crypto audit defense practices. Otto Bosch brings the inside-the-IRS perspective developed during his time as a Revenue Agent in the Global High Wealth Group within LB&I.

The combination matters in a crypto audit. Crypto fluency without IRS-insider perspective leaves the defense reading blind on the agent’s posture and the agency’s internal calculus. IRS-insider perspective without crypto fluency leaves the defense unable to engage the technical issues that drive the case. Both are necessary. Few firms offer both under one roof.

Representative outcomes from the firm’s controversy practice include a $365,000 tax debt reduced to a zero-dollar liability, a multi-year audit and non-filing matter resolved with minimal payment, and ten years of unfiled returns brought into compliance with a successful outcome. Results depend on specific facts. Past results do not guarantee future outcomes.

Frequently Asked Questions

Can the IRS see my crypto wallet?

The blockchain is public. Anyone can see transactions associated with a wallet address. What is not always public is who controls a particular address. The IRS uses blockchain analytics tools, exchange data obtained through John Doe summonses, expanded information reporting, and other techniques to associate addresses with identified taxpayers. Self-custody wallets are not invisible to the IRS — and the assumption that they are has produced significant exposure for taxpayers who relied on it.

What triggers an IRS cryptocurrency audit?

Common triggers include mismatches between exchange-reported data and the filed return, a “no” answer to the Form 1040 digital asset question paired with known activity, John Doe summons data, project-based enforcement initiatives, related-return pickups from another taxpayer’s audit, and whistleblower referrals. Selection paths shape the scope of the resulting examination.

Do I have to report crypto-to-crypto trades?

Yes. Under current IRS guidance, exchanges of one cryptocurrency for another are taxable events that produce gain or loss measured against the disposed asset’s basis. This is true even when no fiat currency is involved. Failure to report crypto-to-crypto trades is one of the most common issues identified in IRS cryptocurrency audits.

What if I used a foreign cryptocurrency exchange?

Use of foreign-domiciled exchanges can trigger FBAR and Form 8938 reporting obligations separate from the income tax return. Penalties for non-filing of these information returns can be severe. Resolution typically involves streamlined offshore procedures, delinquent FBAR submissions, or other voluntary disclosure programs depending on the specific facts and the willfulness analysis.

Can I just amend my returns to fix unreported crypto?

Sometimes — but the answer depends heavily on the facts. Amending returns can be the right approach in some cases and exactly the wrong approach in others, particularly where there is potential criminal exposure or where the taxpayer is already under examination. Decisions about amending, voluntarily disclosing, or simply waiting should be made with experienced controversy counsel — not unilaterally by the taxpayer or a preparer without controversy expertise.

Speak With Kugelman Law

If you are facing an IRS cryptocurrency audit, have received an IRS notice involving digital assets, or have unreported crypto activity you are trying to resolve correctly, schedule a paid privileged consultation with Kugelman Law. Call (415) 968-1780 or visit our contact page. All consultations are fully protected by attorney-client privilege.

The article addresses the IRS Large Business and International (LB&I) Division’s 2024 audit campaign targeting deferred legal fee structures — arrangements in which law firms representing clients on contingency defer recognition of fee income through third-party structures. The campaign followed the IRS’s 2022 generic legal advice memorandum (AM 2022-007), which concluded that fees deferred through certain third-party arrangements must be included in the law firm’s gross income in the year the funds are transferred to the third party. Attorneys interviewed for the Tax Notes article reported that despite the campaign announcement, they have not yet seen active audit activity in the area.

Otto Bosch — a former IRS Revenue Agent from the LB&I Global High Wealth Group who joined Kugelman Law in February 2026 — explained why that gap is normal.

“It is generally normal for an LB&I audit campaign — or any IRS enforcement initiative — to be announced before field agents receive formal training and before training materials are finalized,” Bosch told Tax Notes.

Otto identified the structural reasons for the lag — including required reviews of the Internal Revenue Manual and relevant court decisions — and noted that IRS University, the agency unit responsible for developing and delivering training across the IRS, has been affected by recent changes at the agency.

The Tax Notes piece reports that more than 200 LB&I agents recently received two days of training on the deferred legal fee topic, according to two sources familiar with the matter. That development confirms what Otto and other former IRS practitioners have been telling clients for months: active enforcement is moving from “announced” to “trained” — and the audit window is opening.

Why This Matters for Tax Practitioners and Law Firms Right Now

The announce-then-train gap is structurally normal, as Otto explained. What is not normal is the size of the window the gap creates for practitioners and their clients — and the cost of not using it well.

Three things are true about the current posture of the deferred legal fee campaign:

1. The framework that defines compliance is clearer than the rhetoric suggests. The IRS is not targeting all deferred attorney fee structures. As George A. Luecke and Patrick J. Hindert observed in a June 2025 Tax Notes piece cited in the May 2026 article, the campaign does not appear to target structures that are compliant with the framework laid out in Childs v. Commissioner, 103 T.C. 634 (1994). The IRS’s concern is with arrangements that “materially deviate from Childs” — particularly those involving “aggressive promoters, attorney-taxpayer loans, or other structural elements that, while not technically loans, produce similar economic effects for attorney-taxpayers.”
2. The promoter investigation tells you where the IRS is going. The Tax Notes reporting confirms that the IRS issued information document requests to Brook-Hollow Capital LLC and Brook-Hollow Financial LLC in August 2023 as part of a Section 6700 investigation into whether the companies organized or promoted abusive tax shelters. The IRS’s understanding of the Brook-Hollow structure — a fee paid to one entity and a loan of up to 97% of the deferred legal fees from a related entity — is the kind of structure most at risk.
3. Criminal Investigation is starting to ask questions. The Tax Notes article reports that an IRS special agent asked about deferred legal fee arrangements during a client meeting several months ago, suggesting that IRS-CI is at least exploring the topic. While LB&I has historically been reluctant to make criminal referrals (as former IRS fraud enforcement adviser Michael Welu noted in the article), the involvement of criminal investigators changes the risk calculus for any practitioner whose structures sit outside the Childs safe harbor.

What the IRS-Insider Perspective Adds

One of the reasons Otto was sought as a source for the Tax Notes piece is that the procedural realities of IRS examination — how campaigns are launched, how field agents are trained, how the Internal Revenue Manual is updated, how cases get selected and developed — are not transparent from outside the agency. Practitioners and taxpayers tend to react to enforcement headlines without a clear sense of where the campaign actually is in its operational cycle.

That cycle matters because the right defensive posture depends on the campaign’s stage:

• In the early stages, before active examinations, the priority is positioning — reviewing existing structures against the Childs framework, identifying structural features that materially deviate from it, and considering whether modifications, unwinds, or other proactive steps are warranted.
• As field agents complete training and examinations begin, the priority shifts toward defense readiness — understanding what an LB&I examination of these structures will actually look like, what Information Document Requests the agency is likely to issue, and how the audit will be developed against the framework set out in AM 2022-007 and applied through the lens of Childs.
• Once examinations are active, the priority is execution — defending the specific structure on the specific facts, with the case file built from day one for what comes next at Appeals or in U.S. Tax Court.

The May 2026 Tax Notes reporting suggests the campaign is moving out of stage one and into stage two. For practitioners and law firms with deferred legal fee structures in place — or contemplating them — that transition is the moment when proactive review is most valuable.

How Kugelman Law Approaches These Matters

Kugelman Law advises tax practitioners, law firms, and high-net-worth taxpayers on the full lifecycle of federal tax controversy matters — from pre-controversy structural review through IRS examination defense and, where necessary, U.S. Tax Court litigation. The firm’s combination of capabilities is structured deliberately for matters like this one.

Founder Alex Kugelman brings nearly two decades of federal tax controversy experience, including litigation in U.S. Tax Court and U.S. District Court. Otto Bosch brings the inside-the-IRS perspective from his time as a Revenue Agent in the LB&I Global High Wealth Group — the specialized unit that examines the most complex returns of the wealthiest U.S. taxpayers. We covered the strategic value of this combination in detail in our article on why a former IRS revenue agent attorney changes audit defense, and the underlying examination dynamics in our pieces on what IRS Revenue Agents do and inside the IRS audit playbook.

For practitioners with deferred legal fee structures, the practical question is whether the structure sits comfortably inside Childs, whether any structural elements would be characterized by an LB&I examiner as materially deviating from Childs, and what — if anything — should be done before active examinations begin.

Speak With Kugelman Law

If you advise on or use deferred legal fee structures, or if you have any other complex federal tax controversy matter you would like to discuss, schedule a paid privileged consultation with Kugelman Law. Call (415) 968-1780 or visit our contact page. All consultations are fully protected by attorney-client privilege.

Read the full Tax Notes article: “More Scrutiny of Deferred Legal Fee Structures Could Be Coming” by Lauren Loricchio (Tax Notes, May 26, 2026). Subscription required.

About the Author

Alex Kugelman is the founder and managing attorney of Kugelman Law, a boutique tax controversy and cryptocurrency tax firm serving California and clients nationwide. With nearly two decades of federal tax controversy experience — including litigation in the U.S. Tax Court and U.S. District Court — Alex represents individuals and businesses in their most consequential disputes with the IRS and the California Franchise Tax Board. He is a member of the State Bar of California (No. 255463), admitted to the Bar of the U.S. Supreme Court, and served as San Francisco Chair of the Federal Bar Association’s Tax Division in 2018. He is also a member of the Marin County Assessment Appeals Board and a nationally recognized cryptocurrency tax attorney featured on the Bitcoin.tax podcast and The Mark Milton Show. Read Alex’s full bio.

If you have received an IRS audit notice — or you are worried one might be coming — one of the first questions worth answering is who, exactly, will be examining your return. The answer matters more than most taxpayers realize. The IRS is not a single, undifferentiated organization. Examinations are conducted by specific employees with specific titles, training, and authority — and the most consequential examinations are handled by a particular kind of IRS employee called a Revenue Agent.

So what does an IRS revenue agent do? In short: a Revenue Agent is the IRS employee assigned to conduct in-depth examinations of complex tax returns, develop adjustments, and build the case file the agency relies on at every stage of dispute resolution. A Revenue Agent’s findings become the basis for proposed assessments, penalties, and — if the case escalates — the record that follows the matter into Appeals or U.S. Tax Court.

This article walks through the role of an IRS Revenue Agent from the inside: how cases are selected, what an examination actually looks like step by step, how internal IRS review works, and what taxpayers should understand before responding to the first contact letter. The perspective is informed by Kugelman Law attorney Otto Bosch, who served as a Revenue Agent in the IRS Global High Wealth Group within the Large Business and International (LB&I) Division before joining the firm in February 2026.

What Is an IRS Revenue Agent?

A Revenue Agent is a credentialed IRS employee whose job is to conduct examinations of tax returns. Most Revenue Agents have backgrounds in accounting and have completed extensive in-house IRS training in tax law, examination procedure, and case development. They are professionals, not paper-pushers, and the cases they handle are generally the cases the IRS has decided are worth investing real examination resources in.

Revenue Agents work civilly. That is, they are not criminal investigators (those are Special Agents within IRS Criminal Investigation, or IRS-CI). But Revenue Agents do conduct what the IRS calls eggshell and reverse-eggshell audits — civil examinations that may have parallel or downstream criminal implications — and they are trained to recognize the badges of fraud and to coordinate with IRS-CI when appropriate.

The Revenue Agent’s authority during an examination is significant. They can issue Information Document Requests (IDRs), conduct interviews, summon third-party records under appropriate procedures, propose adjustments, and recommend penalties. What they cannot do alone is impose a final tax liability — that comes through the formal notice procedures and, if contested, through Appeals or the courts.

How IRS Revenue Agents Are Different from Other IRS Personnel

One of the most common sources of confusion for taxpayers is conflating different IRS roles. Three roles in particular are routinely mistaken for one another:

• Revenue Agents conduct civil audits of tax returns. They are accountants who develop adjustments to taxes owed.
• Revenue Officers collect taxes that have already been assessed. They handle levies, liens, wage garnishments, and the negotiation of installment agreements and offers in compromise.
• Special Agents are criminal investigators within IRS-CI. They build criminal tax fraud, money laundering, and related cases for prosecution.

Each role uses different procedures, requires different defensive strategies, and presents different risks. Knowing which IRS employee you are dealing with is the first step in any tax controversy. If a Revenue Officer is on your matter, the assessment phase is over and the focus has shifted to collections defense. If a Special Agent shows up, civil strategy is no longer the right framework. If a Revenue Agent is conducting your audit, the case is in the development phase — and how that development is managed will define the outcome.

How a Return Lands on a Revenue Agent’s Desk

Returns reach Revenue Agents through several distinct paths, and the path matters because it tells the agent — and an experienced defense team — something about the IRS’s interest in the case.

DIF scoring. The Discriminant Function (DIF) system is a statistical model the IRS uses to score returns for audit potential. High-DIF returns are flagged for review and routed for selection. Most ordinary audits begin this way.

Related-return pickups. When a Revenue Agent is examining one return and finds issues that connect to another taxpayer’s return — a partnership and a partner, a corporation and a shareholder, related entities under common ownership — the related return can be opened for examination as well. This is one reason a single audit can quickly grow into multiple coordinated examinations.

Information matching. The IRS receives extensive third-party information — W-2s, 1099s, K-1s, foreign account reports, broker reports, cryptocurrency exchange disclosures — and matches that data against filed returns. Material mismatches generate notices, and significant mismatches can escalate into a full examination.

Compliance projects and initiatives. The IRS regularly runs enforcement initiatives focused on specific issues — syndicated conservation easements, microcaptive insurance arrangements, cryptocurrency reporting, foreign account compliance, and employee retention credit claims, among others. Returns within the scope of an active initiative are far more likely to be selected.

Whistleblower and informant referrals. The IRS Whistleblower Program pays awards for actionable information about tax noncompliance, and substantiated referrals can result in examination.

Global High Wealth and LB&I selection. For the most complex high-net-worth and corporate examinations, returns are selected through specialized risk-based processes within LB&I, including the enterprise-level approach used by the Global High Wealth Group.

The path of selection often shapes the contour of the examination. A DIF-selected return is usually examined for the issues that drove the score. A related-return pickup tends to focus on the connecting transactions. A project-driven examination is concentrated on the specific issue the project is targeting. Recognizing which is which is one of the things a former IRS revenue agent attorney brings to a defense team from day one.

The Anatomy of an IRS Audit from a Revenue Agent’s Perspective

When a Revenue Agent is assigned a case, the examination unfolds along a fairly predictable arc. Understanding that arc — and the agent’s internal incentives at each stage — is essential to responding effectively.

Pre-Contact and Initial Review

Before the agent ever contacts the taxpayer, the case goes through pre-contact analysis. The agent reviews the return, analyst notes, prior-year returns, and any third-party data already on file. They develop a preliminary issue list — the things they expect to examine — and identify the documents they will need. By the time the audit notice arrives in the mail, the agent has already formed initial views about the case. Sophisticated taxpayers (and sophisticated defense counsel) plan around that reality.

The Opening Conference and First Information Document Request

The first formal contact is generally a notice of examination followed by an opening conference (in person, by telephone, or virtually). At or shortly after the opening conference, the agent issues an initial Information Document Request — the IDR — listing documents and information needed to proceed.

The first IDR is one of the most important documents in the entire examination. It defines the initial scope, signals what the agent considers most important, and frames every subsequent issue. Responses to the first IDR generate the second IDR, which is often where the audit’s actual depth becomes visible. Taxpayers who treat the first IDR as routine paperwork frequently regret it.

Issue Development and Fieldwork

This is the heart of the examination. The agent reviews documents, conducts interviews, examines books and records, and develops each issue toward a recommended adjustment. Within LB&I, this stage often involves multiple specialists — international examiners, computer audit specialists, engineers, financial product experts — coordinating on technical questions. Within the Global High Wealth Group, the entire enterprise of related entities and transactions is considered together rather than examined return by return.

During fieldwork, the agent is not only developing issues but also building the workpapers — the internal documentation that will support each adjustment through supervisor review, Appeals, and any subsequent litigation. That workpaper file is the case. Whatever is in it is what the IRS will rely on later. Whatever is not in it is what the taxpayer can challenge.

Internal Review, Supervisor Sign-Off, and Counsel Coordination

Revenue Agents do not act alone. Throughout an examination, supervisors review the agent’s work, push back on weak positions, and approve significant decisions. For complex issues, IRS Counsel may be involved to provide legal advice on questions the examination cannot resolve internally. Aggressive penalties, fraud referrals, summons enforcement, and other escalations all run through layered approval processes.

This internal architecture creates leverage points for the defense. A position the agent personally favors but the manager is reluctant to defend is a different position than one with full institutional backing. Recognizing the difference — and knowing where to apply pressure — is the kind of insight that comes from having been on the inside.

Closing the Case

Examinations close in one of three general ways. A “no-change” closing means the agent did not find adjustments and the return is accepted as filed. An “agreed” closing means the taxpayer accepts the proposed adjustments (typically by signing Form 870 or similar), the deficiency is assessed, and collections begin if amounts are owed. An “unagreed” closing means the taxpayer contests the proposed adjustments, the agent issues a Revenue Agent’s Report and a 30-day letter, and the case proceeds to Appeals — and ultimately, if necessary, to U.S. Tax Court following a statutory notice of deficiency.

How a case closes is heavily influenced by how it was developed during fieldwork. Cases that are positioned correctly during the examination tend to close cleanly. Cases that are mishandled tend to close badly — with assessments larger than they needed to be, penalties that should not have applied, or records that handicap any subsequent appeal.

Where IRS Revenue Agents Work: SB/SE, LB&I, and Global High Wealth

Not all Revenue Agents are equivalent. The IRS organizes its examination function into divisions, and the division handling a particular case tells you a great deal about the agency’s interest and approach.

Small Business / Self-Employed (SB/SE). This is the largest examination division by case volume. SB/SE Revenue Agents handle most individual and small-business audits — Schedule C examinations, smaller partnership audits, closely held business reviews, and a wide range of personal income tax matters.

Large Business and International (LB&I). LB&I handles the more complex side of corporate, partnership, and high-net-worth examinations. LB&I cases tend to involve higher stakes, more specialists, longer timelines, and significantly more sophistication in issue development.

Global High Wealth Group. Within LB&I, the Global High Wealth Group is the most specialized of all — the team that examines the most complex returns of the wealthiest U.S. taxpayers. Global High Wealth uses an enterprise audit approach, looking at the full web of related entities, trusts, partnerships, and personal returns as an integrated whole. Adjustments developed under that approach can surface issues that would be invisible in a return-by-return examination.

For taxpayers facing a Global High Wealth or LB&I examination, the importance of insider perspective is at its highest. The procedures, specialists, internal review processes, and risk calculus inside that group are not visible from the outside. This is precisely the perspective Otto Bosch brings to every Kugelman Law audit defense matter.

What This Means for You as a Taxpayer Under Audit

Two practical implications follow from understanding how Revenue Agents actually work.

First, the early stages of an examination are the most consequential. By the time the case reaches Appeals or court, much of the record is already fixed. Decisions made in responding to the first IDR, in handling the opening conference, in giving (or not giving) interviews, and in producing (or not producing) documents shape the case in ways that cannot be undone later. Audit defense begins with the first contact letter, not with the 30-day letter.

Second, who is on the other side of the table matters. A Revenue Agent in SB/SE conducting a routine Schedule C audit operates very differently than a Global High Wealth team conducting a coordinated enterprise examination. Defense strategy should match the examination — and that match starts with correctly identifying who is examining you and why.

These are the considerations that drive how Kugelman Law approaches every audit defense matter. With founder Alex Kugelman‘s nearly two decades of federal tax controversy and U.S. Tax Court litigation experience and Otto Bosch‘s direct background as a former Revenue Agent in the IRS Global High Wealth Group, the firm pairs federal litigation capability with inside-the-IRS examination experience — a combination most controversy practices simply cannot offer.

Representative outcomes from the firm’s controversy practice include a $365,000 tax debt reduced to a zero-dollar liability, a multi-year audit and non-filing matter resolved with minimal payment, and ten years of unfiled returns brought into compliance with a successful outcome. Results depend on specific facts. Past results do not guarantee future outcomes.

Frequently Asked Questions

What is the difference between an IRS Revenue Agent and an IRS auditor?

“IRS auditor” is a colloquial term that taxpayers use to describe anyone at the IRS conducting an examination. Inside the agency, the more precise terms are Tax Compliance Officer (TCO) — who handles less complex office and correspondence audits — and Revenue Agent, who handles more complex field examinations. Revenue Agents are the personnel who handle the substantive cases.

How long does an IRS Revenue Agent audit take?

Audit length varies dramatically depending on complexity. A focused single-issue examination may close in a few months. A complex partnership or high-net-worth examination, particularly one conducted through the Global High Wealth Group, can take a year or more. Length is also affected by responsiveness, the number of specialists involved, and whether the case is escalated to Appeals.

Do IRS Revenue Agents have authority to assess penalties?

Yes. Revenue Agents can propose accuracy-related penalties, late-filing and late-payment penalties, and in appropriate cases, civil fraud penalties. Penalty assessments generally require supervisory approval and are subject to challenge through Appeals and the courts. Penalty defense is a meaningful component of any sophisticated audit defense.

Can I refuse to meet with an IRS Revenue Agent?

You can decline to be personally interviewed and have your representative communicate with the agent on your behalf in most circumstances. There is rarely a strategic reason for an unrepresented taxpayer to sit for an unprepared interview with a Revenue Agent. The right approach is to retain a tax controversy attorney before any interview takes place.

What happens if I disagree with the Revenue Agent’s findings?

If the examination ends in proposed adjustments you disagree with, you can request a conference with the agent’s manager, file a formal protest with the IRS Independent Office of Appeals, and ultimately litigate the deficiency in U.S. Tax Court (after a statutory notice of deficiency) or in U.S. District Court or the Court of Federal Claims (after paying the deficiency and filing a refund claim). The path that fits your situation depends on the specific facts.

Speak With Kugelman Law

If a Revenue Agent has opened an examination of your return — or you have reason to believe one is coming — schedule a paid privileged consultation with Kugelman Law. Call (415) 968-1780 or visit our contact page. All consultations are fully protected by attorney-client privilege.

Most taxpayers who receive an IRS audit notice make the same first call: their CPA. A few call a tax attorney. Almost none think to ask a more useful question — does the firm I’m hiring have anyone on the team who has actually sat on the other side of the audit table?

A former IRS revenue agent attorney is one of the rarest and most strategically valuable assets a tax controversy firm can put on a client matter. When the IRS examination team across the table is trained, equipped, and incentivized to develop adjustments against you, the single most important advantage you can secure is a defense team that includes someone who was trained inside that same playbook.

At Kugelman Law, that advantage is now part of every audit defense the firm handles, in the form of attorney Otto Bosch — a former Revenue Agent from the IRS Global High Wealth Group.

This article explains exactly what a Revenue Agent does, why an inside-the-IRS perspective changes the outcome of an audit defense, and how clients of Kugelman Law benefit from a team built around that distinction.

What an IRS Revenue Agent Actually Does

“IRS auditor” is a generic term most taxpayers use, but inside the agency, examination roles are highly specialized. A Revenue Agent is the IRS employee assigned to conduct in-depth examinations of tax returns — particularly the complex ones. Revenue Agents are not call-center employees, and they are not the people who issue automated correspondence notices about a missing 1099. They are accountants, often with advanced training and credentials, whose job is to dig into a return, identify issues, and develop adjustments the IRS can defend at every escalation point.

A Revenue Agent’s day-to-day work includes:

• Reviewing returns flagged by the IRS’s Discriminant Function (DIF) scoring system or selected through specific enforcement initiatives
• Issuing Information Document Requests (IDRs) and analyzing what taxpayers and representatives produce in response
• Conducting interviews with taxpayers, representatives, and third parties
• Building case files and workpapers that support each proposed adjustment
• Coordinating with IRS Counsel and supervisory managers on technical and procedural questions
• Issuing Notices of Proposed Adjustment and, ultimately, the formal Revenue Agent’s Report

Inside the IRS, agents are organized by division. The Small Business / Self-Employed (SB/SE) division handles most individual and small-business audits. The Large Business and International (LB&I) division handles corporate, partnership, and high-net-worth examinations. Within LB&I, the Global High Wealth Group is the most specialized of all — the team that audits the country’s wealthiest taxpayers using a coordinated, enterprise-level approach to complex pass-through structures, related-party transactions, and high-value individual portfolios.

That is the team Otto Bosch served on before joining Kugelman Law.

Why a Former IRS Revenue Agent Attorney Changes Audit Defense

There is a meaningful difference between knowing the tax code and knowing how the IRS uses it. Most tax attorneys learn the IRS from the outside — through court opinions, published guidance, and accumulated experience reading agency notices. A former IRS revenue agent attorney learns it from the inside, through formal IRS training, supervised casework, and the institutional knowledge of how examinations are actually run.

That insider perspective shifts audit defense in three concrete ways.

Anticipating What the IRS Will Do Next

A standard audit defense is reactive. The IRS asks; the taxpayer responds. The agent develops the next issue; the attorney scrambles to address it. A defense informed by inside-the-IRS experience is anticipatory. Former Revenue Agents know which issues an examination team is trained to develop, which questions on an early IDR are setting up future adjustments, and which client statements during interviews tend to escalate cases rather than close them. That foresight allows the defense to prepare positions, marshal documentation, and structure responses before the IRS asks — not after.

Reading the IRS’s Internal Risk Calculus

Revenue Agents are not free agents. They work within strict supervisory review processes, technical advice channels, and internal pressure to close cases efficiently. Every decision an agent makes — whether to escalate an issue, whether to push for a fraud penalty, whether to settle or take a position to Appeals — is filtered through that institutional risk calculus. A former Revenue Agent attorney can read those signals. They know when an agent is genuinely committed to a position versus when the agent is fishing for support, when a manager is likely to overrule an aggressive line of inquiry, and when to push for resolution at the examination level versus when to position the case for Appeals or U.S. Tax Court.

Recognizing the Difference Between a Routine Audit and an Eggshell Audit

Some audits are administrative exercises. Others are the early stages of a fraud investigation. The line between them is not always obvious to taxpayers, or even to attorneys without controversy experience — but it is recognizable to a former Revenue Agent. The badges of fraud, the pattern of questioning, the involvement of certain specialists, the timing of certain document requests — these all carry meaning from the inside. Misreading that line is one of the most expensive mistakes a taxpayer can make. Volunteering information to “look cooperative” in what turns out to be an eggshell audit can convert civil exposure into a criminal referral. Insider perspective is what prevents that mistake.

The Specific Advantages an IRS Insider Brings to Your Case

Distilled to a working list, here is what changes when a former IRS revenue agent attorney is part of a client’s defense team:

• Predicting the audit scope. Knowing what an agent’s first IDR will likely contain, and what the second and third will probably address, allows the defense to prepare on the right timeline rather than catching up after the fact.
• Managing IDR responses strategically. IDRs are not innocent paperwork. The information provided in response — and the information not provided — frames every subsequent issue. Insider experience shapes responses that satisfy the request without volunteering exposure.
• Identifying weak IRS positions early. Not every adjustment an agent proposes is a strong adjustment. Knowing which positions are routinely overturned at Appeals, and which positions managers are reluctant to defend, allows the defense to push back where pushing back actually works.
• Avoiding self-inflicted escalation. Many of the worst audit outcomes are caused by missteps the taxpayer or unprepared representative made early — improvised statements during an interview, careless document production, or unnecessary disclosures. A former Revenue Agent recognizes those traps before they spring.
• Speaking the agent’s language. Audits are negotiations as much as they are technical exercises. An attorney who can speak fluently about IRS workpapers, internal review timelines, and statutory procedural requirements from the agent’s own perspective tends to find a more reasonable counterparty on the other side of the table.
• Building a clean record for what comes next. If a case advances to Appeals or to U.S. Tax Court litigation, the record built during the examination is what the case is ultimately decided on. Insider experience shapes that record from day one for what comes after.

Meet Otto Bosch — Kugelman Law’s Former IRS Global High Wealth Agent

The advantages above are not abstract for Kugelman Law clients. They are embodied in the firm’s attorney Otto Bosch, who joined the firm in February 2026 after serving as a Revenue Agent in the IRS Global High Wealth Group within the Large Business and International (LB&I) Division.

The Global High Wealth Group is the IRS’s specialized unit for examining the most complex returns of the wealthiest U.S. taxpayers. Within that group, Otto worked Information Document Requests, Notices of Proposed Adjustment, partnership compliance issues, related-party transactions, hobby loss disputes, and the layered portfolio-level adjustments that define high-net-worth examinations. He led issue meetings with taxpayers and audit teams, served as the intermediary with IRS Counsel, and developed and resolved more than a dozen high-value adjustments using the enterprise audit approach unique to that group.

He also brings experience from KPMG’s Washington National Tax practice — the elite technical group at one of the Big Four — where he advised national and multinational clients on complex partnership and S-corporation transactions. He holds an LL.M. in Taxation with a focus on Partnership Tax, is an IRS Enrolled Agent, and is fluent in Spanish.

For Kugelman Law clients, Otto’s role is to bring that combined background to the defense of every audit, controversy, and high-stakes federal tax matter the firm handles.

When the IRS Insider Advantage Matters Most

Not every tax matter requires a former Revenue Agent. A simple correspondence audit on a missing 1099 generally does not. But the insider advantage becomes decisive in cases where the IRS is investing real examination resources, the technical issues are complex, or the financial stakes are significant. That includes:

• High-net-worth examinations, particularly those conducted under the Global High Wealth enterprise approach
• Partnership and S-corporation audits, where pass-through complexity, related-party transactions, and basis questions create high-leverage positions for either side
• Cryptocurrency tax audits, where the IRS is rapidly building enforcement infrastructure and where insider perspective on how agents are being trained to approach digital assets is invaluable
• Eggshell audits and audits with potential fraud exposure, where misreading the IRS’s posture can transform civil exposure into criminal risk
• Multi-year non-filing matters and offshore disclosure cases, where the order in which issues are surfaced and resolved meaningfully affects the outcome
• Aggressive collections matters, where understanding the IRS’s collections playbook from the inside changes how levies, liens, and resolution alternatives are negotiated

In each of these scenarios, the difference between a competent defense and a strategic defense is often the difference between paying a six-figure assessment and paying nothing.

How Kugelman Law Pairs IRS Insider Experience With Federal Tax Litigation

Otto Bosch’s background is the newest layer of the firm’s audit defense capability — but it sits on top of nearly two decades of federal tax controversy experience under founder Alex Kugelman, who has litigated in U.S. Tax Court and U.S. District Court and built one of the country’s earliest dedicated cryptocurrency tax practices.

That pairing matters. A former IRS Revenue Agent on the team gives clients the insider’s view of how a case is being built. A senior tax controversy litigator gives clients the credible threat of taking the case to court if it cannot be resolved administratively. Most firms can offer one or the other. Few offer both. The result, for Kugelman Law clients, is an audit defense posture that is informed at the examination level by IRS-insider experience and backstopped at every escalation point by federal court litigation capability.

Representative outcomes from the firm’s controversy practice include a $365,000 tax debt reduced to a zero-dollar liability, a multi-year audit and non-filing matter resolved with minimal payment, and ten years of unfiled returns brought into compliance with a successful outcome. Results depend on specific facts. Past results do not guarantee future outcomes.

Frequently Asked Questions

What is a former IRS revenue agent attorney?

A former IRS revenue agent attorney is a licensed lawyer who previously worked as a Revenue Agent for the Internal Revenue Service before entering private practice. Their value lies in combining legal credentials with direct, inside-the-IRS experience conducting examinations — knowledge that informs how they defend audits, controversies, and tax court matters in private practice.

Is hiring a former IRS Revenue Agent legal and ethical?

Yes. Former IRS employees can enter private practice in tax, subject to well-defined post-employment restrictions that prohibit working on specific matters they were personally and substantially involved in while at the agency. Those rules are routinely complied with by former agents in private practice and do not limit their ability to defend the great majority of audits, controversies, and litigation matters.

How is a former IRS Revenue Agent different from a CPA in audit defense?

A CPA can represent taxpayers before the IRS, but does not have the same legal training, attorney-client privilege protection, or litigation authority as an attorney. A former IRS Revenue Agent who is also a licensed attorney combines all three: technical accounting depth, inside-the-IRS examination experience, and full legal authority including privilege and the ability to litigate in U.S. Tax Court and federal district court.

Does Kugelman Law represent clients outside of California?

Yes. Federal tax controversy work — including IRS audits, U.S. Tax Court litigation, and offshore disclosure matters — is handled for clients nationwide. The firm is based in Marin County with offices in San Francisco and Irvine, and all representation is provided remotely.

What does a paid privileged consultation include?

A paid privileged consultation is a confidential, attorney-client privileged conversation with Kugelman Law about the specifics of a tax matter. Unlike free consultations offered by many firms, the paid model allows for substantive legal advice during the consultation itself — including a candid assessment of the matter, the firm’s recommended strategy, and a clear scope of representation if the client decides to engage.

Speak With Kugelman Law

If you are facing an IRS or FTB audit, a tax controversy, or a complex federal tax matter where insider perspective on the IRS would change your defense, schedule a paid privileged consultation with Kugelman Law. Call (415) 968-1780 or visit our contact page. All consultations are fully protected by attorney-client privilege.