All About Audits

The IRS routinely conducts audits to check tax returns for accuracy. An audit does not necessary mean that there was an error on the tax return; the IRS sometimes randomly selects returns for an audit. The IRS matches information on your tax return with other records such as Form W-2 or Form 1099. If the information on the return does not match with the information from other sources, the IRS may conduct an audit to determine the reason for the difference.

You may face an audit because your business partner, investor, etc., is being audited, especially if the IRS wants information on their financial transactions with you. Large corporations are examined by the IRS annually.

Communication about Audit

The IRS will make either a phone call or send a letter through mail to inform the taxpayer about the audit. The IRS never notifies taxpayers using email. Any email communication that uses the name of the IRS is likely to be an attempt at identity theft from scammers. Therefore, never respond to email communications, and report any attempt at theft to the IRS. In addition, be careful when receiving phone calls from the IRS. Scammers commonly call taxpayers pretending to be from the IRS or another government agency and demand immediate payment of a tax debt. If you receive such a call, call the IRS directly to see if you actually owe and report the call the Federal Trade Commission.

The Process of Auditing

When a tax return reaches the IRS, they first compare its information against statistical "norms": statistics compiled from documents that have similar information. If an anomaly is found, the return is next reviewed by an experienced auditor. The auditor scans the return for any errors or discrepancies. If none are spotted, the return may be accepted as filed. If errors are spotted, the return is sent to an examining group for further review.

At the examining group, the manager reviews the returns comprehensively by considering the specific tax laws that apply to that tax return. If the manager is satisfied that no errors are present, the return is accepted as filed. If errors remain, the manager assigns the return to an auditor. The auditor again reviews the return and either accepts the return as filed or contacts the taxpayer for an appointment.

How is an Audit Conducted?

An audit is conducted through mail or in-person. The method of audit the IRS chooses depends on the type of audit based on the severity of the error. An audit may be conducted at an IRS office, at the taxpayer's home or office, or at an accountant's office (field audit).

The IRS may choose to conduct a field audit if a thorough investigation and collection of information is required. In simple cases, correspondence through mail is preferred.

Remember that the purpose of every audit is to gather information so that the correct tax liability can be determined. In case of significant differences in what is owed by a taxpayer, the IRS most often conducts an in-person audit.

Your Rights during an Audit

The IRS will inform a taxpayer about the reason for an audit before the audit is conducted. During an audit, you have the right to ask the IRS for:

  • Privacy and confidentiality about tax matters.
  • Information on why the IRS is asking for information, how the IRS will use it and what will happen if the requested information is not provided.
  • Representation, by oneself or an authorized representative such as a tax lawyer.
  • Appealing about disagreements, both within the IRS and before the courts.
  • Professionalism and courteousness.

In case you consider going to court with the matter, know that the District Court and the Claims Court will not hear tax cases until the tax is paid and the administrative refund claims are denied by the IRS. Though, the IRS or the Tax Court will hear appeals even when the taxes have not been paid.

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