The receipt of an IRS notice informing the taxpayer that s/he was selected for an audit examination naturally creates anxiety. Let’s look at why a return is selected for an audit exam by the IRS.
What Is the Purpose of an IRS Audit?
An IRS audit reviews and examines an individual’s (or business) tax return to ensure it’s reported correctly according to tax laws and to verify that the reported amount of tax is correct.
What Is the Problem Identified With My Return?
Taxpayers need to realize that their selection for an audit doesn’t necessarily mean that there’s a problem. The IRS uses different methods to identify returns to audit. These include:
- Returns selected solely by a statistical formula. It compares your tax return against norms for similar returns. If your return differs from the norm, the IRS wants to know why that is the case.
- Related examinations — Your return may be selected if involved with those of business partners or investors whose returns were selected for audit. For example, the IRS has identified that tax returns that include information from a certain K-1 was handled improperly, and thus it identifies other taxpayers who reported the same K-1 income.
- Taxpayers who engage a disreputable tax preparer who files false tax returns – possible guilt by association.
Types of IRS Audits
- CP 2000 Audits – IRS computers match information reported by the taxpayer against third party information providers, e.g., W-2s, 1099s, K-1s, etc. If there is a mismatch, the IRS sends the taxpayer a CP 2000 notice showing the discrepancy by reflecting both the amounts received by the third parties and the taxpayer and requests that the taxpayer respond.
- Correspondence Audits — The IRS mails the taxpayer a notice showing a possible discrepancy and requests that the taxpayer respond by mail by providing the requested documentation.
- Office Audits – The IRS invites the taxpayer to visit with it at an IRS service center and to bring along the information and documentation being requested by the IRS.
- Field Audits – The IRS notifies the taxpayer that an IRS agent (usually an experienced Revenue Officer) wishes to visit with the taxpayer at their primary residence or place of business.
How Will the IRS Notify Me that I am being Audited?
If your account is selected for an audit, the IRS will notify you by mail — the audit won’t be initiated by phone or email. The IRS manages audits by mail or through an in-person interview to review your records. The interview may be at an IRS office or conducted at your home or place of business or your tax professional’s office.
The audit letter will request information about certain items on the tax return — income, expenses and itemized deductions. If you can’t respond by mail — too many books or records to mail — you can request a face-to-face audit.
The IRS will provide you with a written request for specific documents. These requests are called IDRs – Information Document Requests. The law requires you to keep all records for at least three years from the date the tax return was filed.
Tax Tip #1
If you have been selected for an IRS or state audit examination, immediately contact the tax professional who prepared your tax return and send them the IRS notice you received. The tax professional will likely have in his files the support documentation that you had provided to him when he prepared your return and received your tax organizer. Thus, the documentation requested will hopefully be readily available.
Tax Tip #2
If you inadvertently (or intentionally) failed to include a tax document or report an income item when your return was prepared, now is the time to provide it to your tax professional. Sometimes disclosing this information can facilitate the closing of the audit examination, minimize the assessment of interest and penalties, and perhaps keep the audit from being considered a criminal investigation by the IRS.
Tax Tip #3
If you used a tax preparer who included unsubstantiated deductions or omitted income in the return you filed and that was selected for audit, seek the assistance of an IRS tax resolution specialist to represent you during the audit exam. The IRS assesses penalties against taxpayers and tax preparers when deemed appropriate. You don’t want the tax preparer negotiating with the IRS on issues to reduce the tax preparer penalty at the expense of you, the taxpayer.
Tax Tip #4
You need to understand the IRS’s statute of limitations on making changes to a tax return. The IRS can audit returns filed within the past three years, but if there’s a substantial error, it may add additional years. The agency doesn’t go back more than the past six years unless fraud is discovered. There is no statute of limitations if a fraudulent return is filed.
If the audit isn’t resolved within IRS policy timelines, the IRS will request that the statute of limitations be extended. If the taxpayer refuses to extend the statute, the IRS could issue a jeopardy assessment to protect the government’s interests. An experienced tax professional needs to be consulted before extending the statute.
Taxpayer Rights, Appeals, Etc.
We will discuss in Part 2 your audit rights as a taxpayer and how to appeal an audit decision when you do not agree with the IRS’s findings.
If you would like to discuss your business or personal tax planning, tax preparation, or IRS tax debt problems, or other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
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BE SURE TO READ THE DISCLAIMER PAGE: Tax laws, IRS rules and regulations change frequently. Although we hope you’ll find this information helpful, this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher shall not assume liability for any losses, injuries, or damages from the display or use of this information.
About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.