Pre-IRS Issue Spotting & Compliance Audits

When most people hear “IRS problem,” they picture a letter arriving out of nowhere or an audit that already feels out of control. In reality, many tax controversies start much earlier, usually as a small reporting choice, a missed election, a classification decision, or a recordkeeping gap that grows over time. Pre-IRS issue spotting and compliance audits are designed to find those vulnerabilities before the government does, while you still have options and leverage.

Frazier Law helps individuals, business owners, executives, and high net worth families identify and correct tax issues before they become examinations, collections cases, or criminal investigations. Led by principal attorney Charles R. Frazier and certified public accountant (CPA) Rick Miller, Frazier Law has helped clients since 2009 with tax controversies and IRS defense. Our team handles complex federal tax matters regardless of where you live or operate. Charles is a former IRS agent, holds an LL.M. in Taxation from The University of Alabama in Tuscaloosa, and is also a Chartered Financial Consultant (ChFC) through The American College of Financial Services. With licensing in Tennessee, Michigan, and Texas and a federal practice focus, we bring a practical, preventive approach to tax risk management that is built for real life and real businesses.

What Pre-IRS Issue Spotting Really Means

Pre-IRS issue spotting is the disciplined process of identifying tax positions and reporting patterns that could trigger IRS interest or create exposure if examined. It is not just a checklist. It is a structured review that matches your filing history, supporting documents, and operational reality against the rules that tend to matter most in IRS examinations.

Some problems are obvious once you know where to look, like missing information returns or mismatched income reporting. Others are subtle, like an aggressive method of accounting, a basis miscalculation, or a business deduction pattern that is inconsistent with how the business actually operates. A strong compliance audit aims to detect both.

Why “Before the IRS Contacts You” Matters

Once the IRS initiates contact, the range of options often narrows. Deadlines begin running. Requests come with legal consequences. In some situations, voluntary corrections made after the IRS starts an examination may not carry the same benefits as corrections made proactively.

Pre-audit work can also improve your posture even if you later face an examination. When your records are organized, your positions are supported, and your narrative matches the documents, you reduce the risk of spiraling disputes. You also save time, stress, and professional fees because the “scramble” phase is minimized.

The Difference Between Tax Preparation and a Compliance Audit

Tax preparation focuses on getting returns filed accurately and on time based on the information provided. A compliance audit goes further. It asks whether the underlying positions are defensible, whether documentation exists in the form the IRS expects, whether elections were made properly, and whether your current workflow could create future mismatches.

In other words, preparation is about reporting. Compliance audits are about risk management.

Who Benefits Most From Compliance Audits

Almost anyone can benefit from a proactive review, but certain profiles face higher audit exposure or higher consequences if an error is found.

Business Owners and Closely Held Companies

Owner operated businesses often blur lines between personal and business expenses, and even careful owners can create patterns the IRS questions. Issues commonly involve compensation, shareholder distributions, related party transactions, home office claims, vehicle use, and large travel or meal deductions. Multi-entity structures, especially where there are management companies or related entities, can create additional complexity.

High Income W-2 Earners With Complex Side Income

Executives and professionals may have relatively straightforward wages, but complexity arises from equity compensation, restricted stock units, incentive stock options, nonqualified options, deferred compensation, partnership interests, consulting income, rental properties, and significant investment activity. Small errors in basis, timing, or reporting forms can create large downstream disputes.

Self Employed Professionals and 1099 Contractors

Independent contractors often face estimated tax challenges, business expense substantiation issues, and classification questions, including whether they should be operating through an entity. When contractors also hire others, payroll or 1099 compliance becomes a major risk zone.

Real Estate Investors

Real estate tax planning involves depreciation, passive activity rules, material participation, short-term rental analysis, cost segregation documentation, like-kind exchange timing, and the distinction between repairs and improvements. Many of these topics are common audit targets because they depend heavily on facts and records.

Taxpayers With Cross-Border Activity

International reporting can create penalties even when there is no tax due. Foreign financial accounts, foreign entities, overseas trusts, and cross-border income streams often require specialized reporting and careful coordination.

Anyone With Prior Noncompliance

If you have late filed returns, missing information reporting, or unfiled years, pre-IRS issue spotting becomes essential. The goal is to identify the best path forward, minimize exposure, and avoid choices that unintentionally increase penalties.

Common IRS Risk Areas We Look For

A compliance audit is tailored to the taxpayer, but there are recurring categories that frequently lead to examinations or adjustments.

Income Matching and Information Return Errors

The IRS receives data from employers, banks, brokerages, payment processors, and third parties. Automated matching programs identify discrepancies between your return and the information reported to the IRS. Even honest mistakes can trigger notices.

We often review whether all income sources are properly captured, whether timing is consistent, and whether documentation supports any adjustments.

Business Deductions That Require Strong Substantiation

Certain deductions tend to receive heightened scrutiny because they are easy to overstate and hard to document. Travel, meals, vehicle expenses, home office deductions, and mixed-use expenses can fall into this category.

A compliance audit focuses not just on whether the expense is legitimate, but whether your records meet the substantiation standards the IRS typically demands.

Worker Classification and Payroll Compliance

Misclassification of employees and contractors can create significant exposure. Payroll taxes, withholding, penalties, and interest can accumulate quickly. Even businesses that “do it right” sometimes mishandle fringe benefits, reimbursements, or the tax treatment of certain payments.

Compliance audits may involve reviewing payroll practices, accountable plans, reimbursement policies, and the consistency of your contractor documentation.

Entity and Compensation Planning

For S corporations and closely held entities, the IRS frequently examines whether compensation is reasonable and whether distributions are being used to avoid employment taxes. Partnership allocations, guaranteed payments, and special allocations can also trigger disputes.

We look at your entity structure, your compensation approach, and the documentation supporting how amounts were characterized.

Basis, Loss Limitations, and Passive Activity Problems

Taxpayers often claim losses without realizing that basis rules, at-risk rules, passive activity limits, and other limitations may restrict those deductions. If the IRS disallows losses, the tax impact can be immediate and significant.

A compliance audit examines the basis story from the beginning, not just the current year, because basis errors compound and affect future years.

Accounting Methods and Timing Issues

How and when income and expenses are recognized can depend on accounting methods and elections. Some methods require IRS approval to change. Others must be applied consistently across years. Incorrect application can lead to adjustments, including timing changes that produce unexpected tax bills.

We help identify whether your current methods align with the rules and whether corrective steps are available.

Accuracy-Related Penalties and Reasonable Cause Defense Planning

Many civil tax disputes include a penalty component, often tied to negligence, substantial understatement, or other accuracy-related standards. A proactive review can reduce penalty risk by identifying problems early and documenting the facts supporting your position.

In some cases, the best defense is a well-built file that shows good faith efforts, consistency, and reliance on competent advice.

What a Compliance Audit With Frazier Law Looks Like

There is no single “one size fits all” audit. The right scope depends on your profile, complexity, and risk tolerance. Some clients want a targeted review of a known concern. Others want a deeper review across multiple years and entities.

Step One: Define the Scope and the Risk Goals

We start by clarifying what you want from the process. Are you worried about a specific issue, like payroll classification, crypto reporting, or a large deduction pattern? Are you planning a major transaction and want to ensure historical filings will not derail it? Are you trying to clean up past errors and move forward with confidence?

This conversation sets the scope so you pay for what you need, not what you do not.

Step Two: Gather and Organize the Right Records

Good outcomes depend on good information. A compliance audit typically involves reviewing filed returns, bookkeeping data, bank and credit card records, payroll reports, equity compensation documents, transaction support, and any documentation behind major positions.

We also focus on whether the documents are in a form that can be presented clearly if you ever need to respond to an IRS request. Organization is part of the strategy.

Step Three: Identify Issues and Classify Them by Severity

Not every issue carries the same risk. Some items are administrative and easy to fix. Others involve legal interpretations or fact-intensive standards. We categorize findings so you know what needs immediate attention and what can be addressed as part of longer-term cleanup.

Step Four: Build a Correction Strategy

Corrections are not always as simple as “file an amended return.” The best approach depends on what the issue is, the time period involved, and what the IRS rules allow.

Depending on the situation, options can include filing amended returns, filing missing information returns, correcting payroll practices, tightening documentation, revising accounting methods, making elections properly in future years, or preparing a defensible position for a gray-area item.

Our job is to explain the tradeoffs clearly so you can make a decision you can live with.

Step Five: Implement Ongoing Compliance Improvements

Many problems repeat because the underlying workflow does not change. We often help clients implement ongoing safeguards, such as better substantiation systems, updated reimbursement policies, improved bookkeeping categorization, or documentation practices that prevent future mismatches.

The goal is not just to solve a past problem. It is to build a stronger process moving forward.

Fixing Problems Without Creating New Ones

Correcting tax issues requires care because certain actions can increase risk if handled improperly. For example, filing an amended return might be appropriate in one case, while in another it could trigger unwanted scrutiny or fail to address a deeper reporting problem. Timing, disclosure strategy, and the completeness of documentation all matter.

Frazier Law approaches corrections with a controversy mindset. We think about how your filings look through the eyes of an examiner, not just how they look on paper.

Voluntary Corrections and Strategic Disclosure

Sometimes proactive correction can reduce exposure and bring you back into compliance with less disruption. Other times the right approach is to strengthen documentation and prepare for potential questions rather than rushing into a filing change that creates more confusion.

We help you choose the path that fits your facts and your risk tolerance.

Preparing for the “What If the IRS Asks?” Moment

Even when you never hear from the IRS, there is value in preparing as if you might. A good compliance audit leaves you with a clear set of organized support, documented positions, and an internal understanding of your risk areas.

That kind of readiness reduces stress and increases control if the IRS ever does reach out.

The Advantage of a Former IRS Agent and a CPA Team

Pre-IRS work is part legal analysis, part financial reality, and part strategic communication. Frazier Law’s leadership combines these skills in a way that clients find especially valuable.

Charles R. Frazier’s background as a former IRS agent provides insight into how examinations develop, what examiners tend to focus on, and how issues are framed during disputes. His advanced tax education and experience in controversies support a deeper evaluation of technical issues and procedural strategy. Rick Miller’s CPA perspective helps connect the legal strategy to the accounting records and financial workflow that drive many compliance risks.

Together, the goal is to get ahead of problems early, correct them intelligently, and reduce the chance that a small issue becomes a major disruption.

What You Can Expect After a Compliance Audit

Clients often describe the post-audit feeling as relief, because uncertainty is replaced with clarity. You will typically have:

A clear list of identified risk areas and why they matter. A practical plan for corrections or improvements. Better organized documentation aligned with IRS expectations. More confidence in your tax positions moving forward.

Just as important, you will have a team that can step in quickly if the IRS ever initiates contact, because the groundwork is already in place.

When to Call Frazier Law

If you are already under audit, the focus shifts to defense and response. But if you have a sense that something is off, or if you are growing, restructuring, investing, or preparing for a sale, waiting can be costly.

Consider reaching out if you have had late filings, unfiled years, confusing notices, large swings in income, major deductions that would be hard to substantiate, payroll concerns, multi-state activity, cross-border reporting, cryptocurrency transactions, or simply a feeling that your current system is not as tight as it should be.

Start With a Proactive Review

Tax problems rarely improve on their own. The earlier you address compliance risk, the more options you have, and the more likely you are to resolve issues quietly, efficiently, and on your own terms.

Frazier Law helps clients nationwide with pre-IRS issue spotting and compliance audits, backed by decades of combined experience in tax controversy work and a leadership team that understands both the IRS viewpoint and the practical realities of business and personal finances. If you want to reduce uncertainty, strengthen your compliance posture, and move forward with confidence, contact Frazier Law to discuss a proactive review tailored to your situation.