About IRS Tax Audits

You received a letter from the IRS and your heart drops. The IRS has selected your tax return for IRS audit. What do you do? Why was your return selected? How do you respond? Do you need to hire help? Learn the IRS tax audit process before responding.

Why Was My Tax Return Selected for an IRS Tax Audit?

Generally, your tax return was selected for an IRS tax audit because it triggered a red flag and the IRS believes there is a possible problem with your tax return.

The IRS uses a computer program to review all tax returns. The measurement used is called Discriminant Index Function (DIF) score. Tax returns with a high DIF score will be set aside, and the IRS will select tax returns from this group for IRS Tax Audit.

Example – A taxpayer has a job and earns $100,000. The taxpayer donates to his or her local church. The taxpayer writes off $15,000 in charitable contributions on the tax return. The IRS computer program compares all tax returns with people making $100,000 and giving money to the church. The IRS determines that people making $100,000, on average, donate $5,000 to their local church. The taxpayer with a $100,000 job and donating $15,000 is above the average. This IRS tax return gets a high DIF score and triggers a red flag, which could result in an IRS tax audit.

We do not recommend reducing write-offs so you get a low DIF score. You should write off $15,000 donated to the local church as long as you keep records of the donations.

IRS Tax Audit Types

  • By-Mail or Correspondence Audit – The IRS will send you a letter asking for additional documentation. The IRS will request that all documentation be mailed to the IRS.
    • Returning to the church donation example, if the IRS is auditing the taxpayer who donated $15,000 to the local church, they will a letter asking for proof of the donations. If proof is not provided, then the IRS will remove the donation write-off and charge additional taxes. If proof is provided, then the IRS will close the file.
  • In-Office Audit – Your tax return will be assigned to an IRS Examiner or Revenue Agent. You will meet with the Revenue Agent at the IRS office.
    • This type of audit is more complicated than the by-mail IRS tax audit. This type of audit is done when IRS believes there are multiple problems with your tax return.
  • Field Audit – Your tax return will be assigned to a more experienced IRS Examiner or Revenue Agent. The IRS Revenue Agent will request that the IRS tax audit be done at your home or place of business.
    • This is the worse type of audit. If you are selected for a field audit, the IRS believes there are MAJOR problems with your tax return.
  • Random Audit – Your return was not selected for an audit because of possible issues. The IRS randomly selected it. Your tax return will be assigned to an IRS Examiner or Revenue Agent. The IRS tax audit will take place at either the IRS office, at your home, or place of business.
    • The IRS will go over everything reported on the tax return

 

IRS Tax Audit 7 Process Steps

  1. You are notified your tax return was selected for IRS tax audit.
  2. The IRS will explain your rights.
    • 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 by an authorized representative
    • A right to appeal disagreements, both within the IRS and before the courts
  3. For by-mail IRS tax audits, the IRS will request that you provide proof by a specified date. For all other IRS tax audit types, the IRS will set up an appointment with you.
  4. At the IRS tax audit meeting, the IRS will review your documentation. (Note: You may have only one meeting or several meetings)
  5. Depending on multiple factors, it could take 30 days to 6 months to complete the IRS tax audit.
  6. The IRS will issue you a report of proposed changes.
  7. You will have an option to agree or disagree with the report.
    • If you agree with the report, the IRS will bill you.
    • If you do not agree with the report, you will have the option to appeal the decision or go to tax court.

Now that you are more familiar with the IRS tax audit process, do you hire IRS Audit Representation? In some cases, this is not necessary. In other cases you may want to consider hiring a professional to represent you.