Why am I being audited?
There are a number of reasons why your tax return may be selected for an IRS tax audit. Most IRS audits result from the IRS's analytical program's selection process that scores every income tax return. It is called "DIF" - short for discriminate function. Basically, the further your return varies from what the IRS has determined to be "reasonable expenses/deductions" for your stated vocation/business, the more likely there are errors. In addition to DIF return selections, the IRS pursues various compliance programs - targeting certain occupations or groups where they feel there are compliance issues.
Whatever the reason, receiving an audit notice typically raises concern in the mind of the taxpayer. It is important to realize that most audits are routine. Often, the IRS is just looking for documents to support deductions that from their experience have been problematic - and that lead to the IRS audit.
The IRS audit program has different levels. These audits are performed either at a Service Center (IRS correspondence audit), at a local IRS office (usually performed by an IRS Tax Compliance Officer - or TCO for short), or at the taxpayer's place or business (usually performed by an Internal Revenue Agent). I will discuss each of these below.
The IRS has dramatically increased the number of correspondence audits they perform annually. Correspondence audits are limited in scope to just a few items on the tax return that can typically be verified by the taxpayer mailing or faxing in a few documents. Typically, the items requested include 1099 forms, Schedule K-1 (from partnerships, estates, trusts, Sub-S Corporations, etc) or invoices/checks for expense items. The correspondence unit at the IRS Service Center asks you to mail in photocopies of your canceled checks, receipts or other evidence to prove the deductibility of selected deductions. Generally, IRS correspondence audits are limited to the more simple tax returns where it is feasible to handle it through the mail.
When the IRS reviews a return for audit, they may determine that there is sufficient sophistication of the return to require a face-to-face meeting with the taxpayer. For example, a taxpayer may have a business that appears to be a hobby (such as dog breeding, horse racing, etc) and needs to interview the taxpayer as a means of determining the taxpayer's intent to make a profit. The actual audit notice for IRS Office Audits is mailed to the taxpayer. The notice will list specific items of income and/or expense that are being reviewed. You or your professional tax representative will be asked to provide at the IRS audit hearing specific documents such as bank statements, canceled checks, and so forth. One of the objectives for the IRS in this type of audit it to probe for unreported income. IRS office audits are conducted by a Tax Compliance Officer (formerly called an Office Auditor). Most TCOs have college degrees, but not in accounting. The amount of accounting classes required to be a TCO is far less than required for an Internal Revenue Agent - the most skilled of the IRS examination function employees.
An IRS tax audit that is scheduled to be performed at your home or business is generally a more serious or significant concern. The Internal Revenue Agents that conduct field audits are the most trained and skilled of the IRS examination employees. They typically will examine more items on a tax return, and can extend the audit to other tax years, or to related entities - such as partnerships, corporations, employment taxes - and so forth. Without a doubt, no taxpayer should ever attempt to try and represent themselves before an Internal Revenue Agent. It will be critically important to retain a tax resolution specialist - an Enrolled Agent (EA), or a CPA or Attorney who specialize in and have experience in representing taxpayers selected for examination. Without question, getting IRS audit help from a representative who has experience as an IRS Revenue Agent will be most valuable as they will understand not only the process of the IRS audit, but the guidelines and procedures the IRS agent must follow.
The focus of the audit is to ensure that the taxpayer is in compliance with the law. It is important to recognize that TCOs and Internal Revenue Agents are very pressed for time (they are evaluated on their use of time - a critical element of their job performance). Consequently, they may not perform a thorough and accurate review of the documents and evidence you or your representative provides. There is always the possibility that the IRS auditor will not be totally objective in his or her review and assessment of the evidence provided. They may request the taxpayer to provide documents and information without explaining the purpose for their request. The bottom line is that issues (adjustments to your tax return) as well as penalties may be raised that can add up to thousands of dollars that are without merit. That is why it is important to retain a professional to give your IRS tax audit help in an audit or examination of your return.
Why is getting IRS tax audit help from a professional important?
The Internal Revenue Code is very complex. For this reason, taxpayers make mistakes in the preparation of their tax returns. Even professionals make inadvertent errors. IRS tax compliance officers and Internal Revenue Agents have many weeks of classroom and on-the-job training experience to learn the provisions of the Internal Revenue Code. In addition, the IRS publishes for its employees specific guidance on most every facet of tax law and procedure - called the Internal Revenue Manual - or, IRM for short. Employees are REQUIRED to adhere to the instructions and procedures enumerated in detail in the IRM. Their failure to follow this guidance can lead to adverse performance ratings - and even termination of employment.
Most tax professionals have no or limited knowledge of the IRM and its applicability to IRS audits or IRS collection actions. With my 34+ years of IRS experience as a Revenue Officer, Internal Revenue Agent, Field Examination Group Manager, and Associate Chief of Appeals, I am extremely well versed in not only tax law, but in the procedures that IRS employees must follow in performing their job functions. As an IRS licensed Enrolled Agent, I focus my efforts on providing IRS audit (and IRS collection) help in resolving the IRS controversy.
If you retain me to represent you, generally you will never need to meet personally with the tax compliance auditor. If you are audited by an Internal Revenue Agent, you may be asked to meet solely for an interview. Having a licensed and experienced representative - such as an Enrolled Agent - with you will ensure that the proper questions are asked, and that your responses are focused on responding just to the questions. It is my opinion that you do not want to be in the presence of an Internal Revenue Agent without representation.
So, if you receive an IRS notice of audit, do not panic! Instead, give me a call to discuss the notice. We can discuss if it makes sense for you to be represented, and if it does, I will be pleased to give you the IRS audit help you need so that you get through the process with the least amount of stress and tax deficiency as possible.