The Cost Segregation Audit Techniques Guide shows exactly how IRS examiners test a study. To be audit-ready, make sure your study is prepared by qualified people, uses a reliable engineering-based method, ties back to your actual cost, explains the legal basis for each classification, and is stored with all supporting documents. Then file any required Form 3115 correctly.
This content is not tax or financial advice for you. Please talk with a CPA to find what's right for your situation.
How an IRS examiner reviews a study
The guide walks examiners through a review process. In plain terms, they'll typically:
- Review the preparer. Who did the study, and are they qualified?
- Read the methodology. Is the approach reliable and clearly explained?
- Check the math. Do the allocated amounts reconcile to the total cost basis?
- Test the big items. Examiners focus on the largest dollar amounts and the most aggressive classifications.
- Look at the legal reasoning. Are items correctly treated as personal property versus building structure?
- Check related filings. For look-back studies, was Form 3115 filed properly?
Your audit-ready checklist
Before the study
- Choose a provider with engineers or certified cost segregation professionals
- Confirm the method (detailed engineering estimate or actual cost approach)
- Agree on a flat fee, not a percentage of savings
- Ask whether audit support is included
During the study
- Provide closing statements, appraisals, plans, and invoices
- Allow a site visit or a thorough virtual tour
- Answer questions about how each space is used
When you receive the report
- Check that the total ties to your cost basis
- Make sure land is excluded
- Confirm the placed-in-service and acquisition dates
- Look for named preparers, photos, and legal citations
At tax time
- Give the full report and depreciation schedule to your CPA
- For look-back studies, attach Form 3115 to your timely filed return and file the required copy with the IRS
- Make sure real estate professional or short-term rental claims are backed by time logs
After filing
- Keep the report and all backup for as long as you own the property, plus at least three years after the sale year's return
Items examiners commonly challenge
| Often challenged | Why |
|---|---|
| Structural items labeled 5-year property | Walls, roofs, and general HVAC are part of the building |
| General electrical and plumbing | Only systems serving specific equipment usually qualify |
| Inflated land improvement values | Must be supported by real quantities and unit costs |
| Unsupported percentages | "Rule of thumb" allocations lack documentation |
| Indirect costs | Closing costs and fees must be spread logically |
What if you're already under audit?
- Contact your study provider right away. Many include audit defense.
- Work through your CPA or tax attorney for all IRS communication.
- Provide exactly what's requested, organized and complete.
- Don't guess. If something wasn't documented, say so and let your advisor respond.
Frequently asked questions
Does the guide apply to small rentals?
Can a strong study still be adjusted?
Is audit support worth paying for?
See what your property may qualify for
Run our 2-minute STR Qualification Quiz or model your Low / Mid / High cost segregation range.
Related guides
The IRS Cost Segregation Guide (Publication 5653) in Plain English
The IRS Cost Segregation Audit Techniques Guide, Publication 5653, explained simply: what it covers, what changed in 2025, and why property owners should care.
Read guideIRS Cost Segregation Requirements: What a Quality Study Must Include
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Read guideWhat's in a Cost Segregation Report (and How to Read One)
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Read guideCost Segregation and the IRS: Is It Legal? Does It Raise Audit Risk?
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Read guideThis content is not tax or financial advice for you. Please talk with a CPA to find what's right for your situation.