Nuts and bolts of an IRS audit

Tuesday , June 10, 2014 - 12:00 AM


An audit can be a stressful event. The taxpayer has the burden of proof for deductions that are being challenged by the IRS. There are several types of audits that are common: correspondence, office visit, and on-site or field audits.

Correspondence audits are initiated with letters to taxpayers requiring verification of deductions and/or exemptions shown on the return. The IRS uses computers to generate a DIF score or the discriminate function system score. DIF is the name the IRS calls the computer generated score the IRS uses to select tax returns to undergo IRS audits. The majority of audited income tax returns are selected by means of DIF score. DIF score is a statistical profile that is computed by comparing the tax numbers (income, expenses, and deductions) on income tax returns with numbers generated using national statistics for taxpayers in a similar income tax bracket. Usually a correspondence audit results from mismatched information the IRS receives and that reported by the taxpayer. When a return has been selected for a correspondence audit, the IRS has developed a series of computer generated notices with respect to various issues on a tax return. The IRS notice will grant the taxpayer 30 days to respond to the notice.

When a taxpayer responds to a correspondence examination notice, the response is processed by a first read section at the Compliance Center which attempts to determine the nature of the response. The Internal Revenue Manual provides that taxpayer replies or responses to the correspondence letter should be processed within 30 days. However, depending on the workload the time frame may be longer.

Office audits are of income tax returns which indicate under $100,000 in total positive income. Most of these audits involve deductions taken on Schedule A and Schedule E. The office audit commences with a notice to the taxpayer requesting his/her appearance at an IRS office on a certain date. Office audits are conducted in a very summary fashion. The letter received by the taxpayer will list a series of documents which the taxpayer must bring to the audit. The taxpayer can request a change in the audit date to a date more convenient to the taxpayer’s schedule. The IRS considers the initial interview to be the most important part of the examination process. The taxpayer has the right to have a representative at the interview. The scope of an office audit is generally much more limited than a field examination. Examiners are generally expected to only audit issues raised by the classification section of the IRS. In most cases, the auditor must secure group manager approval prior to opening new issues during the audit.

Field or on-site audits are handled by revenue agents who have at least 30 credit units of accounting. They are better trained than compliance officers. Field agents are responsible for auditing high income non-business and business 1040 returns. These agents conduct almost all of the audits of corporate tax returns. Normally a revenue agent will audit more than one year at a time. For example, if the 2011 return is being audited, 2010 and 2012 may also be brought into the audit. The agent will review deposits to checking and savings accounts for the years at issue. He will also look at the disbursements from those accounts. Revenue agents put more emphasis on the quality of records and methods of accounting.

The best preparation for an audit is good documentation regarding the issues raised in an audit. Audits are learning experiences for the taxpayers. Realizing during the audit that what was deducted on a tax return was not property documented will result in owing the IRS money. In addition, penalties and interest can be assessed. The IRS expects proper documentation when taking a deduction and unfortunately, a taxpayer is expected to know how to document the deduction ahead of time. The publications, codes, and other source documents from the IRS are vast and taxpayers should take the time to know how to document a deduction prior to taking it on the tax return.

Tracy Bunner is an enrolled agent and tax preparer with an office in Harrisville. She can be reached at 801-686-1995 or at

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