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The IRS conducts hundreds of thousands of audits each year. An IRS audit is a review or examination of an organization’s or individual’s tax accounts and financial information to ensure it was reported correctly. The IRS has three different methods of selecting a taxpayer for audit.
The first method is random selection, which is based solely on a statistical formula that the IRS uses internally. The second method involves a computer screening. Returns are compared against other similar returns. Any items outside of the norm for similar returns are flagged and then reviewed for audit.
The third method involves related examination. The IRS may select a taxpayer’s return for audit if they have issues or transactions involved with a different taxpayer who is under audit, such as a business partner or an investor, so the audit of one taxpayer can lead to an audit of another taxpayer.
Our tax audit attorney can assist if you believe you are at risk of an audit or have been notified that one has begun.
Generally, no, because if a taxpayer signs a tax return, they become responsible for the information it contains, meaning the IRS is only auditing the taxpayer and not any preparer who helped them put it together. However, a tax preparer or accountant likely has the supporting documentation used to initially prepare the return, which can be very helpful during an audit.
Higher income earners are more likely to be audited than lower income earners. Additionally, returns that are out of the ordinary can be flagged for audit by automated computer review of tax returns. If one return has a large difference in payment as compared to other similarly situated tax returns, then statistically, it is likely to get flagged. If a taxpayer has a history of non-compliance, the current audit will be more closely scrutinized and the IRS will utilize more resources during that audit.
The IRS also has a whistleblower procedure where someone can file a Form 3949-A, an information referral form. This allows them to report activity to the IRS that allegedly violates income tax law, which the IRS will review and determine whether to audit that taxpayer.
There are a few red flags the IRS can use to initiate an audit, such as a change in method if something was previously reported the same way repeatedly, as well as outside of the norm reporting, and perhaps the biggest one: non matching principles. Certain transactions including your W2s, K-1s, and 1099s are reported to the IRS by the issuing party, and if individuals don’t report those transactions, and the IRS already has information, that’s a red flag that could lead to an audit.
Tax returns should be filed with complete and accurate information, and on time each year. Tax attorneys are not allowed to advise taxpayers to take positions based on the likelihood of being audited. If a transaction was reported correctly, then both the taxpayer and the attorney can quickly and efficiently close an audit if one should arise.
There’s no foolproof way to avoid being audited since some of it is statistical and some of it is random. However, filing complete and accurate returns is the best way to stay in compliance with the IRS. You can also put yourself in the best position to resolve an audit by saving any supporting documentation for six years. Call Pontius Tax Law to learn more about what is needed to resolve an audit.
Pontius Tax Law, PLLC strives to resolve sensitive tax problems through trust, dedication, and value. The law firm was founded by John Pontius with offices in Washington, DC, Maryland, and Virginia. Mr. Pontius is a tax law attorney who represents individual and business clients with sensitive and serious tax matters before the Internal Revenue Service and state taxing authorities. His client base is local, national, and international.
