Audit Representation for 1031 Exchanges

Tax Audits Happen—Here’s What You Need to Know

IRS and state tax audits are more common than many people realize. For example, California’s FTB alone conducts over 200,000 audits annually. Most are routine, and many result in no change. However, when they involve 1031 exchanges, they can be time-consuming and highly technical.

At EPC, we transform what could be a stressful experience into a manageable one. Our goal is to help you understand the process, defend your tax position, and minimize your exposure—so you can move forward with peace of mind.

Why 1031 Exchanges Are Flagged for Audits

A 1031 exchange allows you to defer capital gains taxes by reinvesting in a new investment property. However, the IRS and FTB scrutinize these transactions due to the significant value of tax deferral involved.

Common audit triggers include:

• Incomplete or mismatched paperwork
• Valuation discrepancies
• Misunderstandings about Delaware Statutory Trust (DST) reserve funding

Even if you followed all the rules, your exchange might be selected for review—either randomly or due to perceived anomalies.

Representing Yourself in an Audit? Think Again.

If you were pulled over by a police officer, would you try to defend yourself on the spot—or call someone who understands the rules?

Tax auditors are investigators. Their job is to uncover underreported income or improper deductions. If you represent yourself, you could unintentionally say something misleading or fail to respond appropriately to documentation requests.

That’s why EPC is here: to speak the auditor’s language, present the correct facts, and protect your interests.

Why EPC Is Your Best Ally in a 1031 Exchange Audit

• 🧠 1031 Exchange Expertise:

  We focus exclusively on 1031 exchanges and related tax strategies. Unlike general accountants or tax preparers, we’ve handled hundreds of exchange-related audits and know exactly what to expect.

• 📄 Audit-Ready Documentation:

  Our proprietary software generates detailed workpapers designed specifically for audit review. These documents demonstrate that your transaction was completed correctly and help prevent further scrutiny.

• 🛡️ Audit Assurance Warranty:

  If we planned your exchange, you’re covered. Our Audit Assurance Warranty means we’ll represent you in any IRS or FTB audit related to that exchange—at no extra cost. This unique service gives our clients true peace of mind.

• 🤝 End-to-End Communication:

  We handle every interaction with the IRS or FTB—from written responses to phone calls and meetings. You’ll stay informed, but you won’t be put on the spot.

• 🧭 Strategic Defense Planning:

  Some audits are best resolved by presenting comprehensive documentation. Others require negotiation or clarification of DST-specific concerns. We tailor our approach to your situation.

Real-World Audit Example: The DST Reserves Misunderstanding

One common audit pitfall involves Delaware Statutory Trust (DST) reserves. Some auditors mistakenly believe that reserves—shown on “Use of Proceeds” tables—are taxable boot. This is incorrect.

EPC helps clarify that:

• DST reserves are pre-funded by the sponsor.
• Reserves are not paid using your exchange proceeds.
• Therefore, they are not taxable as boot.

Our detailed documentation and clear explanations help auditors understand these nuances and reduce the likelihood of negative audit outcomes.

What Happens During a 1031 Audit?

Here’s how we guide you step-by-step:

1. We Review Your Exchange: We reconstruct the transaction with audit-level documentation.
2. We Submit the Right Evidence: We respond to all information requests with exactly what the auditor needs.
3. We Manage the Conversation: We handle every interaction and, if needed, escalate to the auditor’s supervisor or appeals.
4. We Defend Your Return: Whether it’s providing full support, addressing minor adjustments, or negotiating penalties, we stand by your side.

Audit representation is both an art and a science—and EPC has mastered both.