Types of IRS Audits
Many taxpayers will deal with an IRS audit at some point in their lives. It may be a simple correspondence audit, or it involve a field visit to your business. Regardless of the type of audit, it can be scary and frustrating.
Correspondence Audit Program
A correspondence audit is conducted complete through correspondence. Such audits are for issues that involve records that can easily be submitted by mail. Examples of issues that are covered by a correspondence audit include:
• Dependent Exemptions
• Earned income tax credits (EITC)
• Child Care Credits
• Adoption Credits
• Educational Credits
• Certain itemized deductions and Schedule C expenses
While correspondence audits are less intimidating since they do not involve a face-to-face audit, they can be extremely frustrating. There is no one assigned to your case. These cases are worked by Tax Examiners. The case will often be handled by a different person each time you call the IRS or submit documents. You may have to go back and forth over the course of several months to get an issue resolved at the correspondence audit level.
Automated Underreporter Program (AUR)
The IRS uses computer-matching and error-checking programs to verify the accuracy of tax returns. The most common notice generated by the AUR is a Notice CP2000. A CP2000 informs the taxpayer that there is a discrepancy between income shown on the tax return and income that was reported by others. For example, if you had cancellation of debt (which is considered income), the creditor will issue a 1099-C to you and file it with the IRS. If your tax return does not include that income, the AUR will generate a Notice CP2000 informing you of the mismatch.
An office audit is a face-to-face examination with a Tax Compliance Officer (TCO). The majority of cases worked by a TCO involve Schedule C issues. The TCO will audit up to 4 vital issues and possibly additional issues on the return with managerial approval. If you are chosen for an office audit, you will receive an examination letter, requesting you to call and set up a day and time to have your return and supporting documents examined. The TCO will also send you an Information Document Request (IDR) which contains a list of documents that the TCO wants to review.
TCOs are trained to not only verify questionable expenses and credits on the tax return, but to also look for unreported income. Such examinations can be highly invasive and difficult for clients. However, you should know that TCOs should not automatically request bank statements without meeting specific criteria in the Internal Revenue Manual.
If you’ve received a letter requesting an office examination, you should hire a tax professional.
Field audits are conducted through on-site visits by a Revenue Agent (RA). Unlike TCOs who examine individual, self-employed, and disregarded entity returns, RAs examine only business returns. In addition, there are RAs in the Small Business/Self-Employed (SB/SE) department and RAs that are assigned to Large Business and International (LB&I). SB/SE revenue agents will audit business returns with assets under $10 million.
The first contact with an RA is through a letter providing a time, date, and place of examination of the taxpayer’s books and records, along with an Information Document Request (IDR). If you have a representative, the examination can be conducted at the practitioner’s office.
A field audits will always include a reconciliation of income from books, records, and bank statements to the tax return. The revenue agent will already have picked issues to review prior to the examination but will examine additional issues as necessary.