The IRS Audit Process

In 2015 the IRS audited a total of almost 1.4 million tax returns, approximately 0.7 percent of all returns filed in calendar year 2014. 0.8 percent of all individual income tax returns filed were audited and 1.3 percent of corporation income tax returns filed were audited (Source: 2015 Internal Revenue Service Book October 1, 2014 – September 30, 2015).


 

When does the IRS decide to audit?

  1. A taxpayer has made an error in reporting income or expenses
  2. A taxpayer has not provided required documentation to the IRS
  3. A taxpayer will need to substantiate a tax deduction or credit

Audits vary according to the taxpayer’s income, residence, occupation, type of return, and type of transaction. Audits are more likely for taxpayers with adjusted incomes and for the self-employed, particularly sole proprietors.

IRS Red Flags:

  1. A taxpayer claiming 100 percent business use of a vehicle
  2. Deduction of meals, travel, and entertainment on Schedule C
  3. Rental real estate losses
  4. Owners of cash intensive firms (i.e. taxis)
  5. Failure of a taxpayer to report foreign bank accounts
  6. Taking higher than average deductions

How will the IRS contact a taxpayer they decide to audit?

The IRS will generally contact the taxpayer by mail and ask the taxpayer to respond via mail.

What types of IRS audits are there?

  • Correspondence Audit – communications and exchange of documents between the IRS and taxpayer is conducted by mail
  • Desk Audit –  examination at an IRS office between the taxpayer and/or taxpayer’s representative and the IRS
  • Field Examination –  conducted by the IRS at the taxpayer’s place of business or the taxpayer’s home

How can the IRS contact the taxpayer’s C.P.A.?

  1. The taxpayer must designate that person on the IRS Form 1040, 1040A, or 1040EZ in the area above the signature line
  2. Another option for the taxpayer can be to complete the IRS Form 2848 entitled, “Power of Attorney”. The Power of Attorney Form is required for audits and appeals within the IRS system

What happens during the IRS audit of the taxpayer?

  1. First, the IRS will conduct initial meetings and review the documentation submitted by the taxpayer
  2. Next, the IRS will issue a letter or written report of proposed adjustments to the taxpayer’s tax returns
  3. Upon completion of the proposed adjustments, the taxpayer may request a meeting with the supervisor of the IRS auditor who prepared the adjustments outlined in the letter of the report. Contact my firm for more information.

 

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