Receiving a notification of an IRS audit can be a frightening event. Part of taxpayers’ uneasiness with the process stems from the uncertainty of the situation — “why am I here?” and “what happens now?” Here you will find some basic information about IRS audits. If you need IRS audit help or IRS audit representation to deal with the auditor on your behalf, feel free to contact us at (720) 507-1829 to set up a consultation to go over your tax matter.
What is an Audit?
Simply put, an audit is where the IRS verifies entries on the taxpayer’s tax return by reviewing the taxpayers’ accounts and financial information. In some cases, an audit looks at whether the appropriate amount of income was reported. In other cases, the IRS is challenging the taxpayer to prove entitlement to entries made on the taxpayer’s tax return.
Reasons for Audits
Though the IRS accepts most tax returns as filed, sometimes the IRS will select returns for examination. Common reasons for selection include random screening, computer selection, document matching, and information developed from other sources.
For computer selection, the IRS uses an algorithm that evaluates returns for high likelihood of errors or omissions that would result in changes to the return, if the IRS audited it. Common areas of concern for the IRS include self-employed taxpayers, taxpayers with home office deductions, automobile expenses, or large amounts claimed as itemized deductions.
Document matching relies on forms third parties are required to file with the IRS, such as Form 1099 or W-2. If the tax return doesn’t match the amounts reported on these forms, it can trigger an audit.
Information developed from other sources that suggest non-compliance can also trigger an audit. One large source of information includes other audits. For example, if the IRS audits a business that has partners or investors, the result of the business audit can trigger individual audits. Commonly, the IRS will even open up additional years for audit depending on what they adjust for a single year.
Types of Audits
An IRS Audit comes in one of four types — correspondence audit, office audit, field audit, and Taxpayer Compliance Measurement Program (TCMP) audits.
Correspondence audits are conducted entirely by mail. The IRS sends letters requesting information about items shown on the tax return such as income, expenses, and itemized deductions. These tend to be the simplest audit types.
Office audits involve face to face meetings with an IRS Examiner, who is usually an accountant or has an accounting background. These audits are generally more in-depth and can involve some complicated issues.
Field audits are more serious than office audits since the IRS Examiner wants to personally inspect a business, a home office, or other property.
Taxpayer Compliance Measurement Program audits are the most in-depth and serious audits. The purpose of these audits is essentially to calibrate the IRS algorithms that they use to select taxpayer returns for audit. In these audits, each line of the taxpayer’s return will need to be substantiated. Fortunately, this type of audit is quite rare.
The Audit Process
The audit process will begin with an IRS Notice of Examination and a request for information and documents. Office or Field audits will also propose a time for a meeting. When a taxpayer fails to respond to these notices, the Examiner can subpoena records from third-party institutions, such as banks.
Responding to Examiner requests often requires knowledge of the tax code, both in what the taxpayer is entitled to, as well as how to properly substantiate it. Hoping to get the process over with quickly, taxpayers will often provide too much information at this stage, which may increase the scope of the audit.
Once the Examiner has reviewed the information and documentation they requested, they will issue an Examination Report, which contains the proposed changes. If the taxpayer provides additional information, the Examiner may revise the Report. Once the Examiner feels as though they have reviewed everything, they will issue a Final Examination Report and what’s known as a “30-day Letter.” At this point, if the taxpayer still does not agree with the proposed changes, the taxpayer has 30 days to appeal the Examiner’s determination to IRS Appeals.
After the 30 day letter expires, the taxpayer will receive a Notice of Deficiency, also called the “90-day Letter.” Once this Notice is issued, the taxpayer has 90 days to file a petition with the United States Tax Court if they wish to contest the determination.
The examination process can be frustrating, confusing, and difficult for a taxpayer to handle alone. If you need someone to guide you through the process and deal with the IRS directly on your behalf, feel free to contact us at (720) 507-1829 to set up an appointment to go over your tax matter with you.
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