What You Should
Know About IRS Audits
If you're like most people, an IRS audit is one of your worst
nightmares. Understanding the types of audits and how returns are selected for audit may
help ease your mind.
The IRS conducts three types of civil audits:
- Correspondence audits are handled entirely by mail. They consist of
written questions about apparent errors, such as filing status discrepancies or wages
reported on Form W-2 that do not appear on the wage earner's tax return. Unclear or
evasive answers can generate an assessment or escalate the case to an office audit.
- Office audits begin when a taxpayer is summoned to the local IRS
office to meet with an agent. The notification letter specifies the items to be examined
and asks the taxpayer to bring certain records to the meeting. Although office audits
generally are limited to the specific items requested, the agent can expand the scope if
the taxpayer's explanations raise additional questions.
- Field audits may be conducted at the taxpayer's business or at an
accountant's office. All pertinent records must be available at the chosen site. The
examination will cover all tax-related activities for the years under audit.
Various factors determine which returns are audited, including:
- Matching program. Information returns (such as Forms W-2 and 1099)
are matched to tax returns, using social security and other identifying numbers.
Discrepancies usually generate correspondence audits.
- Statistical analysis. The IRS selection program analyzes hundreds of
variables to arrive at ratings (called DIF scores) for tax returns. The program compares
actual returns filed to "typical" taxpayer profiles. Unusual features, such as
higher than average deductions, result in higher DIF scores which increase the likelihood
of audit.
- Occupation. According to the IRS, returns filed by certain taxpayers,
such as self-employed individuals and farmers, understate taxable income at a higher than
average rate. Therefore, higher percentages of these returns are audited.
- Income level. Higher-income taxpayers are audited more often.
Generally, an individual with income over $100,000 is three times more likely to be
audited than a person with income between $25,000 and $50,000.
Always call us when you receive a letter from the IRS, the
Florida Department of Revenue, or other tax authorities. We will advise you, respond on
your behalf, and represent you if you so desire.
Related Information:
Ideas and
Information About Taxes
Selecting a Tax Advisor
Tax Services
© Copyright 2001 Raymond S. Kulzick. All rights reserved.
010805.
This publication provides business, financial planning,
and/or tax information to our clients. All material is for general information only and
should not be acted upon without seeking appropriate professional assistance.
Contact rkulzick@kulzick.com with questions or
comments about this web site.
Copyright © 2001 Kulzick Associates, PA - Last modified: September 13, 2008