Know the Basics about the Audit Process

In an earlier post, we discussed what an audit letter might look like. If you do receive an IRS letter stating that you’re being audited, you’ll then have to respond with any documents or other evidence you think will help prove you didn’t commit tax fraud.

According to the IRS documents, “selecting a return for examination does not always suggest that the taxpayer has either made an error or been dishonest. In fact, some examinations result in a refund to the taxpayer or acceptance of the return without change.”

Needless to say, this type of letter can be a stress-inducing moment. 

The IRS reports that the overwhelming majority of taxpayers files returns and make payments timely and accurately. “Taxpayers have a right to expect fair and efficient tax administration from the IRS, including verification that taxes are correctly reported and paid with enforcement actions against those who fail to comply voluntarily.”

Some of the many reasons a taxpayer might receive an audit include:

• Some returns are selected based on information obtained by the IRS through efforts to identify promoters and participants of abusive tax avoidance transactions. This could include “John Doe” summonses issued to credit card companies and businesses.
• Some returns are selected for examination on the basis of computer scoring, based on significant changes in past filing amounts — both up and down.  Generally, IRS personnel will review these computer generated lists, selecting those that are most likely to need review.
• Large corporations often get IRS examinations annually
• Information mismatching between W-2 forms or 1099s and tax returns may create a audit review.
• Related examinations may occur, based on other audits – such as a business partner or investors.
• Finally, some IRS area offices identify returns that are connected to local compliance projects. Higher IRS management input is required for such activity.