IRS Form 1226: Tax Examination Response and Audit Guide
Successfully manage an IRS income tax examination and respond to findings on Form 1226. This checklist covers document preparation, meeting protocols, and the appeals process.
Confirm the tax year and forms listed on the examination notice
Check the upper right corner of the notice for the specific tax periods under review. IRS agents often expand audits to adjacent years if they find significant errors in the initial year.
Identify the type of examination being conducted
Correspondence Audit (by mail)
Office Audit (at an IRS facility)
Field Audit (at your home or business)
Mark the response deadline on your calendar
Most examination notices require a response within 30 days. Missing this deadline results in a statutory notice of deficiency, which limits your options for administrative appeal.
Hire a qualified tax representative
Submit Form 2848 (Power of Attorney) to the IRS immediately. This allows your CPA or Enrolled Agent to handle all communications, often preventing you from having to speak directly with the agent.
Document Gathering and Substantiation
Gather all bank statements for the 12-month period under review
Provide statements for every account held, including those not used for business. Highlight transfers between accounts to prevent the IRS from double-counting deposits as taxable income.
Match 1099s and W-2s to the reported income
Identify any missing forms or discrepancies early. If a 1099 was issued in error, contact the issuer for a corrected form before the IRS meeting.
Organize receipts by the expense category on Schedule C or E
Group receipts by line item (e.g., Office Expenses, Supplies). Avoid handing over a 'shoebox' of mixed receipts, as this increases the agent's scrutiny and audit time.
Produce contemporaneous mileage logs for vehicle deductions
Logs must show the date, destination, business purpose, and odometer readings. The IRS routinely disqualifies estimates or logs created after the tax year ended.
Secure proof of payment for all claimed deductions
Canceled checks
Credit card statements
Electronic transfer confirmations
Prepare a summary sheet for each audit issue
Create a cover page for each category summarizing the total dollar amount and the number of supporting documents. This demonstrates organization and may lead the agent to sample documents rather than review every receipt.
The Examination Meeting
Provide copies of documents rather than originals
Original documents can be lost or misplaced during the examination process. If the IRS requests an original, ask to have it photocopied in your presence and returned immediately.
Answer only the specific questions asked by the agent
Volunteering extra information can expand the scope of the audit. If a question is unclear, ask the agent to rephrase it before providing an answer.
Request an Information Document Request (IDR) for new inquiries
Ask the agent to put any new requests for documents in writing via Form 4564. This creates a paper trail of what was asked and when you provided it.
Track all documents handed over to the IRS
Maintain a transmittal log showing the date, document description, and the name of the agent who received it. This prevents disputes over whether a specific proof was provided.
Reviewing Form 1226 and Proposed Changes
Verify the header information on Form 1226
Ensure the name, Taxpayer Identification Number (TIN), and tax period are accurate. Errors here can cause misapplied payments or delays in closing the case.
Cross-reference adjustments with Form 886-A
Form 886-A (Explanation of Items) provides the legal reasoning for each adjustment. Check if the agent applied the correct Internal Revenue Code section to your specific facts.
Recalculate the interest shown on the report
Interest rates for underpayment change quarterly. Use the IRS interest factor tables to verify the calculation from the due date of the return to the current date.
Evaluate accuracy-related penalties under Section 6662
The IRS often adds a 20% penalty for 'substantial understatement.' If you had reasonable cause and acted in good faith, submit a written request for penalty abatement.
Check for mathematical errors in the agent's summary
Agents use software to generate Form 4549 and Form 1226, but manual data entry errors occur. Re-add the proposed adjustments to ensure they equal the total change in tax.
Finalizing or Appealing the Outcome
Sign Form 870 if you agree with the findings
Signing this form waives your right to go to Tax Court but stops the accrual of certain interest and penalties. Only sign if you are certain you do not want to appeal.
Request a meeting with the agent's manager for unresolved disputes
If the agent is being unreasonable or misinterpreting the law, a manager conference can often resolve the issue without a formal appeal. Do this before the 30-day letter is issued.
File a formal protest within 30 days if you disagree
Submit a written protest to the address on the notice to move your case to the Independent Office of Appeals. You must include the facts, the law, and an argument for each disputed item.
Verify the delivery of your protest via certified mail
Use USPS Certified Mail with a Return Receipt. If the IRS claims they never received your protest, this receipt is your only proof of timely filing.
Consult a tax attorney for potential Tax Court litigation
If Appeals does not reach a settlement, you will receive a Notice of Deficiency (90-day letter). This is the final step before you must file a petition in U.S. Tax Court.
Frequently Asked Questions
What is the difference between Form 1226 and Form 4549?
Form 1226 serves as the cover sheet and summary for the examination report, while Form 4549 (Income Tax Examination Changes) provides the detailed line-by-line breakdown of the proposed tax adjustments. You will typically receive both at the conclusion of an audit. Form 1226 highlights the total amount due, including interest and penalties, whereas Form 4549 explains the specific changes to your income and deductions.
Can I record my interview with the IRS agent?
Yes, you have a legal right to record any in-person interview with the IRS under the Taxpayer Bill of Rights. You must provide 10 calendar days' advance notice to the agent. Note that the IRS also has the right to record the session if you do, and they will use their own professional equipment to create a transcript.
What happens if I ignore the Form 1226 notice?
Ignoring the notice leads the IRS to issue a 'Notice of Deficiency' via certified mail. This gives you exactly 90 days to petition the U.S. Tax Court. If you miss that 90-day window, the tax assessment becomes final, and the IRS will begin collection actions, including liens on property or levies on bank accounts and wages.
How do I request an extension to respond to an examination report?
Call the examiner or their manager at the number listed on the notice before the 30-day deadline expires. The IRS can typically grant a one-time 15-to-30-day extension if you can demonstrate a valid reason, such as illness or the need for more time to gather records. Always follow up a verbal extension request with a written confirmation sent via certified mail.