How to Respond to an IRS Cost Segregation Audit
On receipt of an audit notice involving cost segregation, contact your cost seg engineer immediately. The engineer prepares the audit defense documentation aligned to the 13 Principal Elements under IRS Publication 5653 Chapter 4. Respond to the IRS Information Document Request on the deadline. WeCostSeg's included five-year audit defense covers correspondence, office, and field audits at no additional charge.
Step 1: Notify the engineer
On receipt of any IRS notice involving a cost segregation study, contact the engineer who signed the study the same day. The engineer needs time to prepare the audit defense documentation.
WeCostSeg's five-year audit defense begins on study delivery and covers all audit types initiated within the five-year window at no additional charge.
Step 2: Review the Information Document Request
The IRS issues an Information Document Request (IDR) listing the items required. For a cost seg audit, the IDR typically requests the study report, supporting documentation (photos, source records, computation worksheets), Form 3115 if a look-back was used, and depreciation schedules.
Review the IDR with the engineer and your CPA. Identify any items that may require clarification or additional documentation.
Step 3: Prepare the response
The engineer prepares the defense response aligned to the 13 Principal Elements. Each Principal Element gets a documented response: preparer qualifications, methodology disclosure, asset classifications, photo log, source document references, citations to Pub 5653 and case law.
Submit on the IDR deadline. Request extensions if needed. The IRS typically grants reasonable extensions when requested in advance.
Step 4: Engage with the examiner
Subsequent IDRs may follow. Continue working through the engineer's defense documentation. Field audits may include site visits or interview requests.
If the examiner proposes adjustments, escalate to Appeals if warranted. WeCostSeg's defense includes correspondence with Appeals. Tax Court litigation is a separate engagement.
Frequently asked questions
- How does WeCostSeg coordinate with my CPA?
- Every engagement follows the three-touch CPA Coordination Protocol. Preliminary analysis CC'd to your CPA on intake, draft report shared five business days before final delivery, and Form 3115 filing coordinated when a Section 481(a) adjustment applies.
- Does OBBBA's 100% bonus apply to my acquisition?
- 100% applies to property under a binding contract on or after January 20, 2025 per Public Law 119-21. Property under a binding contract on or before January 19, 2025 stays on the legacy phase-down: 40% in 2025, 20% in 2026, 0% in 2027 and after.
- Is audit defense included?
- Yes. Every WeCostSeg engagement includes five years of written audit defense at no extra charge, aligned to the 13 Principal Elements of a Quality Cost Segregation Study under IRS Publication 5653 Chapter 4.
- Can I get a free preliminary analysis?
- Yes. Submit property details via the free proposal form or WhatsApp. Engineer-reviewed estimate returned within four business hours during US Eastern hours.
Zawwad Ul Sami, Founder
Zawwad Ul Sami is the founder of WeCostSeg, a founder-led cost segregation firm serving real estate investors across the US. He focuses on strategy, pricing, and the firm's overall direction.