If your return has been selected for audit, it will go through one of four audit procedures:
1) Initial Compliance Center Audits are conducted when a return is first received to ensure that all information matches what the IRS has on records. Information filed by third parties is keyed to your social security number and compared with the information on your return. If a mismatch is found, the taxpayer will receive a letter known as a CP 2000, which requests an explanation of why income items were not included on the return. In addition, all returns are checked by the Compliance Center to screen for mathematical errors and to make sure all of the proper schedules have been attached.
2) Correspondence Audits primarily regard issues that are easy resolved through mail and do not require significant investigation. Returns selected for correspondence audits primarily deal with simplistic verification issues such as interest, taxes, charitable contributions, medical expenses, taxes paid, other miscellaneous deductions or issues that would not be appropriate for the more detailed audit levels. Once IRS personnel have determined the issue for examination, a computer generated notice will be sent to the taxpayer with a thirty (30) day deadline to respond. Taxpayer responses are sent to an examiner for review to determine their sufficiency.
Our office frequently guides taxpayers through the correspondence audit process and assists them in preparing a response to the IRS Compliance Center. Having experienced counsel prepare your response coupled with accurate documentation will greatly reduce your chances for an examination change. In addition, we can help you avoid providing excessive information, which may expand the scope of the audit.
3) Office Audits generally regard Schedule A (Itemized Deductions), Schedule C, and Schedule E (Rents and Royalties) issues for individuals who earn less than one hundred thousand dollars ($100,000 USD). Office audits usually deal with a particular issue and usually concern only a particular year. However, auditors frequently open up multiple years when they find an issue that may be inaccurate on several prior returns. Office audits consist of an initial interview with an IRS Examiner. The IRS Examiner will seek information relating to the financial history, nature of employment, and will look for issues that suggest the potential for under-reporting of income or deductions which should be disallowed. The responses given by the taxpayer could potentially expand the scope of the audit or open up multiple years of returns to review.
Office audits have the potential to be very costly and/or time consuming. Taxpayers can expect the auditor to take copious notes during the interview and even innocent statements can be misconstrued or taken out of context. This could expand the scope of the audit or, in certain circumstances, expose the taxpayer to potential criminal liability. The financial records or substantiation you are asked to provide will be scrutinized in great detail. Office auditors are well-trained in the issues they are assigned to audit. Taxpayers are strongly advised to level the playing field by having a qualified tax attorney represent you during your office audit. This can significantly decrease your overall tax liability and assure that you are not taken advantage of by the representative.
4) Field Audits are the most detailed level of IRS investigation and are conducted by Revenue Agents. All IRS Revenue Agents are accountants who have completed substantial accounting coursework and have undergone a high level of training. In addition, most Revenue Agents specialize in a particular industry and therefore have a variety of experiences dealing with taxpayers in your industry.
Normally, the agent will emphasize:
- whether all income was appropriately included on a return; and
- whether deductions were taken in compliance with the Internal Revenue Code.
It is not unusual for an agent to perform a full reconciliation of a taxpayer’s return with their books, bank records, and other information. The agent will look for flaws and other discrepancies with the return and will open up multiple years if s/he finds an issue that warrants further investigation. In addition, during audits of closely held corporations or other small businesses, it is not unusual for the Revenue Agent to examine the tax returns of major corporate shareholders and officers.
Revenue Agents also conduct Financial Status Audits designed to investigate lifestyle expenditures. To the extent that expenditures exceed reported sources of income, the agent will automatically presume the underreporting of income. The burden rests with the taxpayer to prove that income was not underreported. Revenue agents frequently check property records, DMV registrations, credit databases, as well as statistics based on the taxpayer’s zip code and have usually reviewed this information prior to conducting a field audit.
We strongly advise you to obtain the assistance of a qualified tax attorney immediately once you have been notified of a field audit. Although Revenue Agents should maintain impartiality during the course of an audit, the function of their job is to uncover discrepancies with income and deductions. The time and expense of a field audit is not undertaken without some suspicion that you owe additional tax. The Revenue Agent is there to find flaws associated with your tax return and is not easily deterred from his/her task.
Agents may seem friendly, but often a pleasant demeanor is used to garner information from the taxpayer. This information is often later used against the taxpayer at various stages of the audit. Even innocent sounding questions are designed to probe information from the taxpayer. Agents are also required to report potential criminal behavior to the Criminal Investigations Division (CID) of the IRS. Even honest mistakes may expose taxpayers to criminal prosecution, regardless of intent. Furthermore, Revenue Agents are less inclined to take aggressive or unreasonable positions when working in a professional setting with experienced tax counsel, because of the very likely possibility of working with an attorney at a later point. Our firm frequently deals with the same groups of Revenue Agents and has established a great working relationship with them. We can use our past experiences to your benefit whereas the Revenue Agent knows they will probably never encounter the individual taxpayer again.
If you have any questions or if we can further assist you, please contact our San Diego IRS audit attorneys today.
For more information, please see: