Friday, April 18, 2008

A Primer on IRS Tax Audits

A letter from the IRS rarely brings good news. Frequently the letter explains that your personal or business tax return has been selected for audit. This post contains information about the audit process that can help reduce anxiety during the IRS’ examination.

An audit will most often be conducted by an IRS Revenue Agent. A Revenue Agent is not concerned with the person’s or business’s ability to pay the tax asserted, rather, their focus is simply on the determination of what they believe is the proper amount of tax due.

Generally, when an audit occurs, it may be categorized as a compliance center audit, office audit or field audit. A “compliance center audit” is conducted by letter and generally concerns a discrepancy in information on the records of the IRS and the information on a tax return. An “office audit” is typically also a correspondence audit and concerns certain specific issues on a specific tax return. A “field audit” will take place at a taxpayer’s place of business or at a representative’s office. Field audits are not limited to specific issues or tax years.

When the IRS conducts an audit, it will request information by several means, including information document requests (“IDR”), summons, third party summons or a taxpayer interview.

In an IDR, the IRS requests documentation and asks questions concerning items on the tax returns. When the IRS issues a summons, it is making a more forceful request for information that can be enforced in a proceeding in the federal district courts. This gives the taxpayer an opportunity to challenge the summons on certain grounds. Similarly, a taxpayer has the chance to challenge summonses issued to third parties. Taxpayer interviews can only be required following the issuance of a summons. Knowing what information the IRS is looking for provides an understanding of the tax issues in which the IRS has interest.

Once an audit is concluded, the Revenue Agent will issue a report of his or her findings. These items in the report may be resolved with the Agent based on the tax laws. The Agent cannot resolve the case based on the chance that the IRS could ultimately lose the issue in court. If a resolution cannot be reached, the Agent will issue either a “30-day” or “90-day” letter which provides the taxpayer another opportunity to settle the case with the Appeals Division of the IRS before having to proceed to court.

No comments: