When an individual receives notice of an IRS audit, knowledge and planning are the first considerations. Whether the audit is for a person or business, it is important to know the basic steps of an IRS audit. Individuals and businesses should understand why they were selected for an audit. In addition to understanding the myths about IRS audits, individuals must be aware of pitfalls in the audit process. In short, for those audited by the IRS, it is essential to know what to expect.
Why Did the IRS Select Me or My Business for an Audit?
There are three main reasons a tax return may be selected for audit by the IRS, as follows.
Random Selection Based on IRS Statistical Formula
The IRS uses a computer system known as the Discriminant Index Function (DIF) to review all tax returns. The DIF analyzes various lines of the return and assigns the entire return a numerical rating known as a “DIF score.” The higher the DIF score, the greater the likelihood the return will be selected for audit. The majority of audits fall under this category.
Relation to Other Audited Tax Returns
The IRS may select the return when it involves issues or transactions related to other audited taxpayers. This situation commonly involves business partners and investors.
Incriminating Evidence Provided to IRS
The incriminating information could arise from IRS investigations, investigations by other government entities, or evidence provided by whistleblowers.
The IRS Audit Process
Types of IRS Audits
There are three main types of IRS audits, which are explained in more detail here:
- Correspondence Audit: The entire audit is performed by mail. This is the most common type of audit.
- Office Audit: The audit is performed in-person at an IRS office. The taxpayer or their representative meets with IRS personnel.
- Field Audit: The IRS auditor performs the audit at the taxpayer’s home or business. This is the most comprehensive and intrusive type of audit.
Steps in IRS Audit Process
The purpose of an IRS audit is to ensure all information reported to the IRS is accurate, and that the reported tax amount is correct. The audited person or entity must generally demonstrate they reported the correct taxable income and claimed the correct deductions, credits, and exemptions.
The IRS will request specific documents in writing. The taxpayer can request extensions of time to provide documents or meet in-person.
An IRS audit concludes in one of three ways:
- “No change audit”, where the taxpayer has provided backup for their return and the IRS makes no changes.
- The IRS proposes changes to the return, and the taxpayer agrees with those changes.
- The taxpayer disagrees with the IRS’s proposed changes.
Disputing Tax Audit Results
When a taxpayer disagrees with the IRS’s proposed changes, they may request a conference with an IRS manager. The taxpayer can also seek mediation with the IRS, or they may file a formal appeal with the IRS Appeals Division. Finally, the taxpayer can fight the audit results through litigation in U.S. Tax Court or other federal courts.
US International Tax Advisors | Contact a Maryland Tax Attorney Right Away
If either you or your business is facing an IRS audit, you should speak with a Maryland tax attorney at the US International Tax Advisors. Contact US International Tax Advisors at 844-796-8565 to schedule a consultation.
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