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The Tax Return Audit Process

No matter how carefully you work on your tax return, the IRS (or a state department for state taxes) can still select your tax return for an audit, which is unavoidable. This is because the IRS has the authority to randomly (or intentionally) choose your tax return even if there's no actual problem. Read on to learn about the IRS tax return audit process.

Tax Audit Selection Process

The IRS selects tax returns for an audit to verify that the information reported is accurate. Selecting a tax return does not automatically means that it has errors or problems. However, the IRS will mostly choose the ones that have issues in the statistics based upon the the numbers provided by the taxpayer. There are several factors in selecting a tax return to conduct an audit. Here's a list of six methods that the IRS use to select tax returns for an audit:

  1. Abusive Tax Avoidance Transactions: Tax returns can be selected to identify promoters and participants of abusive tax avoidance transactions.
  2. Computer Scoring: The IRS uses two computer systems to analyze potential errors and calculate numeric scores. The Discriminant Function System (DIF) score indicates the potential for changes. The Unreported Income DIF (UIDIF) score indicates the potential of unreported income. Then, highly-scored tax returns are selected for tax audit.
  3. Large Corporations: The IRS have traditionally selected many tax returns for large corporations every year.
  4. Information Matching: If the income reported on the tax return and the income from the payer reports do not match, it raises a red flag. The IRS will intentional select tax returns with red flags to uncover errors and frauds.
  5. Related Examinations: Tax returns that have issues related to other taxpayers, such as business partners or investors, can be selected for an audit.
  6. Others: The IRS may select certain tax returns as a part of local compliance projects. These projects require approval of higher level management.

Notification Letters to the Taxpayers

For any type of tax audit, the IRS sends out notification letters to the taxpayers. If you've received a notification letter, be sure to read carefully because it will contain important information on your tax return audit process. The notification letter should contain reasons why your tax return has been selected for an audit, instructions to follow, and a deadline to reply to the letter. If you need additional time to reply, you may request a one-time 30-day extension to the IRS in writing.

Different Ways of Processing the Audit

There are two different ways to process a tax return audit: (1) by in-person interviews and (2) by mail. The IRS may require an in-person interview for certain tax return audits that have potential errors and red flags. The IRS may conduct these interviews at an IRS office, your home, your business office, or an accountant's office. The IRS will assign time, place, and method for an interview. Although in-person interviews aren't common for most audits, the IRS may conduct these types of interviews for individuals or businesses especially when fraud or other criminal activity is suspected.

For less serious types of tax audits, the IRS will communicate with you by mail, without meeting in person. The IRS uses this method for correspondence audits, which refer to the process of requesting additional information to verify the accuracy of your tax return. As long as you submit proper documents, the IRS will not require an in-person interview.

Types of Tax Audit Outcomes

There are three different outcomes of a tax return audit. First, the IRS may make changes to your tax return and charge you additional interests, taxes, or penalties. You can accept those changes and pay the outstanding balance. Second, the IRS can verify the information and conclude that they are accurate. In that case, the IRS will end the audit process without making any changes to your tax return. Third, the IRS can determine that your tax return is subject to additional interests, taxes, or penalties, and you may reject that conclusion. In order to dispute such outcome, you need to make a request for an in-person conference with an IRS manager. You will need to prepare yourself to challenge the assessment with supporting documents.

Was Your Tax Return Flagged for an Audit? An Attorney Can Help

In most cases, the IRS chooses a tax return for an audit because there were red flags in the process of examining the report. If your tax return has been flagged, going through the tax audit process puts you in a higher risk of paying additional taxes and penalties. To help alleviate your concerns, contact an experienced tax attorney in your area today.

Next Steps

Contact a qualified tax attorney to help you navigate your federal and/or state tax issues.

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