Audits & Examinations
Benjamin Franklin once said, “In this world, nothing is certain but death and taxes.” And for many people today, both are equally as frightening. We all dread even the thought of an IRS audit or examination.
Audits can be intimidating because they require you to explain the nature of your income and substantiate the expenses and deductions claimed on your tax return. However, receiving an IRS Notice informing you that your return has been selected for examination does not mean or imply that that you have made an error or done something dishonest. The most important thing is not to panic and to realize that, if handled correctly; many IRS audits actually result in a refund or an acceptance of a return without change. When faced with an IRS audit, selecting a qualified tax professional to provide IRS audit defense is well worth the investment. IBA Tax Group can quickly give you an idea of what to expect when facing an IRS audit.
Believe it or not, the actual odds of an individual income tax return being selected for examination are quite low. Less than 1.5 percent of individual income tax returns are audited, according to recent U.S. Treasury Department reports.
But a generally complex return may increase the odds of being audited. High-income taxpayers who are involved in intricate real estate transactions or who run their own real estate or construction businesses may run a higher risk of being selected for an audit. Similarly, taxpayers who report their business activities on schedule C of their 1040 form also may have a greater chance of being selected.
An IRS examination should not be feared, but on the other hand, it should not be taken lightly. In addition to filing an accurate return and keeping complete records, taxpayers should know their rights and engage an attorney, certified public accountant, enrolled agent, or other qualified professional when appropriate.
Who Gets Audited?
The IRS selects which individual tax returns to examine in several different ways. These include random selection; examination of refund or credit claims by matching documents such as W-2 and 1099 forms against income tax returns; and the computerized Discriminant Function System, referred to as DIF. DIF essentially assigns a numerical weight to specific items on tax returns. If the total score exceeds a certain predetermined threshold, the tax return is flagged for potential audit. However, the IRS guards its DIF secrets extremely well so that unscrupulous taxpayers cannot fly under the radar undetected.
The examination process generally begins when the IRS sends written notification to a taxpayer that a return has been selected for an audit. The notice indicates which items are being questioned and what records the taxpayer needs to resolve the questioned items.
Examinations handled by mail are known as correspondence audits. A taxpayer may be able to resolve disputed tax return items by providing documents to substantiate a tax return position by mail. Other taxpayers may meet with a local IRS agent for an office audit.
Although a correspondence audit may be settled more quickly than an office audit, no general rule suggests that either is more beneficial to the taxpayer. However, switching from a correspondence audit to an office audit could widen the scope of an investigation.
At the conclusion of an examination, the IRS agent either proposes an adjustment or accepts the tax return as originally filed. If an adjustment is proposed, the taxpayer either can pay the additional tax or appeal it.
If you have received an IRS Notice of Audit, contact us regarding our affordable IRS audit and examination defense and representation. To schedule an appointment Call 888-493-0666, E-mail or Skype us!