An IRS audit can be extremely time consuming and burdensome for a taxpayer. It is also an extremely invasive intrusion into one’s life. Often times, auditors will bombard taxpayers with questions, extracting specific information that helps their case. Hiring an experienced attorney can create a barrier between the IRS and the taxpayer, as the taxpayer does not need to be present during the audit appointment. Moreover, taxpayers cannot be “put on the spot” and forced to answer specific questions about difficult subjects.
Frequently, records are difficult to obtain for older periods. As a general rule, pursuant to the Internal Revenue Code, taxpayers are entitled to a deduction for expenses so long as they were actually incurred, regardless of whether records exist. As a Certified Public Accountant and Forensic Accountant, I am well versed in methods of reconstructing these expenses and presenting them to the auditor in a logical format. On many occasions, I have successfully resolved audits with limited records or no records and receipts at all.
How Returns Are Selected For Audit
The IRS selects returns using a variety of methods, including:
- Computer Scoring — Some returns are selected for examination depending on an artificial score assigned by a computer. Computer programs give each return numeric “scores”. The Discriminant Function System (DIF) score rates the potential for change, based on past IRS experience with similar returns. The Unreported Income DIF (UIDIF) score rates the return for the potential of unreported income. IRS personnel screen the highest-scoring returns, selecting many for audit and they also identify the items on the returns that are most likely to have potential for an adjustment.
- Information Matching — Some returns are examined because payer forms, such as Forms W-2 from employers or Forms 1099, do not match the income reported on the tax return
- Participants in abusive tax avoidance transactions or foreign accounts— Some returns are selected based on information obtained by the IRS through efforts to identify promoters and participants of abusive tax avoidance transactions. Examples include information received from “John Doe” summonses issued to credit card companies and businesses and participant lists from promoters ordered by the courts to be turned over to the IRS.
- Related Examinations — Returns may be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for examination.
- Other — Area offices may identify returns for examination in connection with local projects such as local compliance initiatives, return preparer projects, or specific market segments. Additionally, audits may be triggered by information received from informants.
An examination may be conducted by mail or through an in-person interview and review of the taxpayer's records. The interview may be at an IRS office (office audit) or at the taxpayer's home, place of business, or lawyer's office (field audit).
Congress has recognized the questionable behavior of some IRS employees in the past. As a result, the IRS has enacted a Bill of Rights for taxpayers. It is important to be knowledgeable about these rights, because often times, IRS employees engage in conduct that is in direct violation of their guidelines. Although taxpayers may not be aware of these rights, they include:
- A right to professional and courteous treatment by IRS employees.
- A right to privacy and confidentiality about tax matters.
- A right to know why the IRS is asking for information, how the IRS will use it and what will happen if the requested information is not provided.
- A right to representation, by oneself or an authorized representative.
- A right to appeal disagreements, both within the IRS and before the courts.
My Audit Experience Includes:
Employment Tax Audit
Civil Fraud Penalty
Disallowed Business Expenses
Real Estate Transactions
Characterization of Income
Abusive Trust Arrangements