IRS audits can be really scary but here is what you need to know and this information should alleviate some stress.
IRS Audits are conducted by either a Tax Compliance Officer or a Revenue Agent. The job of both is to confirm the accuracy of the information reported on a tax return.
Tax Compliance Officers conduct audits from their IRS offices. Revenue Agents, since they are generally more experienced, travel into the field (to a taxpayer’s home or authorized agents office) to review and examine records as well as analyze whether or not the information on the tax return is consistent with the provided records.
There are three different types of audits. They are tax compliance audits, office audits and field audits.
Compliance Center Audits are done by letter and are based on discrepancies between information provided on a tax return and information provided by a third parties such as W-2s and 1099s.
Office audits can be simple correspondence between the taxpayer and auditor (i.e. just sending the requested information to the auditor) or can require a visit to the local IRS office. Generally, these audits center around specific issues on a tax return. Often times, if the requested information is provided (either by mail or by a visit to the auditor’s office), the audit can be quickly and easily resolved.
Generally field audits are conducted at a taxpayer’s place of business. However, often times this can disrupt business therefore it is preferable to conduct the audit at the auditor’s office or at the tax payer’s representative’s office. Most of the time, auditors will accommodate such an arrangement.
Information Needed to Conclude the IRS Audit:
Submitting the requested information is crucial. Information is requested in several different ways: through an information document request (aka “IDR”), summons, third party summons, or interview.
An IDR is a written request for documentation. Usually the request is laid out in an outline format. The IDR will tell you what line on the return is at issue as well as the supporting documentation that needs to be provided in order to resolve any such discrepancies.
A summons is a more forceful way of requesting information. Summonses can be issued to the taxpayer directly or to a third party. An example of a third party summons is if a taxpayer fails to provide bank statements, an auditor can issue a summons to the bank in order to obtain the bank records that the taxpayer either can’t provide or fails to provide. Furthermore, a summons is the only way an auditor can actually require a tax payer to make a visit to the auditor’s IRS office.
Again, providing the requested information is very important. Failing to submit the information will undoubtedly lead to increases in the tax liability. Often times just submitting the proper documentation will be enough to avoid an increase in tax. Conversely, it is important to not give too much information either. Giving information unrelated to the request could open up a return to more inquisitions (that were not originally part of the initial audit). An over abundance of information could lead to adjustments on certain items of the tax return that weren’t even in question to begin with.
At the conclusion of the audit, a report will be issued based on the auditor’s findings. Once the report is issued, there are a number of different options available to a taxpayer. The taxpayer can accept the report’s findings, can challenge the findings by appeal or can challenge the findings by filing a petition in tax court. Therefore, an audit report with an increase in tax liability might not be the ultimate finding. A taxpayer does have options after an audit report is issued.
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