An IRS tax audit is a review, or an examination, of a taxpayer’s account and financial information. This is done to ensure that everything is properly recorded according to the tax laws, and to verify that the calculation of tax is correct. If the taxpayer is audited and there are unreported income or overstatement of deductions, then additional tax will be due; as well as civil penalties and, in a worst-case scenario, potential for criminal penalties.
As a trustworthy audit defense attorney will tell you, the IRS may examine your return for a single year, or multiple years, to ensure that the underlying income and expenses were properly reported. If you have a significant amount of money at issue, you should retain legal counsel during an audit or examination of tax returns in Washington DC.
Audits commonly occur because of a mistake on a tax return (often a math error). Taxpayers that have more than $1 million of gross receipt could be more at risk for audit, especially if they have unreported income or excessive expenses. Additionally, taxpayers can be selected randomly, based upon a computer screen. It is also possible for a taxpayer to be brought into an examination if they have notable interaction with another taxpayer being audited.
There are several types of IRS examinations for tax returns. One is called correspondence, where it would be conducted via phone calls, letters, faxes, virtual meetings, et cetera. This is typically the least serious type of audit. Another option is an office audit where the taxpayer goes to the nearest IRS office to review and explain their tax returns.
The third type would be a field audit, where the IRS agent would come directly to the taxpayer’s (or their representative’s) location to review the underlying tax return documents. Although this represents the most serious type of case, it may be easier and quicker to resolve a dispute in person.
The IRS can use a computer screening to select tax returns for examination, and they look at the discriminant inventory function, also known as the DIF score. The higher the score, the greater the chance of an audit. Publication 556 provides more information. They also randomly audit taxpayers to ensure that everyone feels that they could be at risk for an audit; and decides to do the right thing by properly filing and paying their taxes each year.
The IRS uses many examination methods. One common method is to do a bank deposit analysis to review a taxpayer’s bank statements and determine income. They will look at all the money that came into a bank account in a given year, minus transfers. All the deposits listed will be considered as income unless the taxpayer can explain otherwise. The IRS will also view expenses by reviewing things like bank statements, credit card statements, receipts, mileage laws, and other books and records.
Taxpayers always have appeal rights. Publication 1 entitles one’s rights as a taxpayer, including the taxpayer’s bill of rights, and Bill of Right 5 is the right to appeal an IRS decision to an independent forum. Although this right exists, it is still best to retain counsel to try to resolve the tax at the lowest administrative level. An audit that goes to appeals is more complicated and much harder to resolve when there were mistakes made during the audit itself.
The best advice is to try not make any mistakes and confuse the IRS or taint their opinion of the taxpayer. If the audit is done properly by a tax professional, an appeal would be much less likely to occur.
The IRS will give a statutory notice of deficiency to a taxpayer at the end of an audit and they generally have three years to assess the tax from when the return was filed. The taxpayer will have 90 days after receipt of a statutory notice of deficiency to petition U.S. Tax Court to resolve the proposed increase of tax.
Most audit examinations involve substantiation of income and deductions. A tax attorney could provide the IRS with the minimum information needed to efficiently close the audit examination with the least amount of adjustments, while preventing the increase in the scope of the audit. Non-lawyers are not equipped to handle major audits because they are not familiar with the various rules, and they may not have all the documents easily accessible. Call Pontius Tax Law today to relieve the stress of an audit or examination of tax returns in Washington DC.