Audit - the word that strikes fear in the heart of taxpayers. While we completely understand why taxpayers are nervous about being audited we also know from working with clients under audit everyday that a lot of that fear comes from not understanding the audit process.
The first step in the audit process is actually determining which returns to audit. The IRS has a system that all returns are pushed through that helps flag what returns need a closer inspection. This computer system has internal algorithms that flag tax returns that have a high chance of under-reporting income and of generating additional tax. This system also flags returns that have obvious errors.
Once the returns are flagged they are not automatically put into examination (the IRS wording for an audit). These returns are pulled for manual review by an IRS employee. After manual review if the return is deemed to potentially have an understatement of tax the return will be selected for audit. Certain returns that have blatant math errors or whose numbers do not match those of the information returns filed for that taxpayer (such as 1099s) may get automatic letters/notices sent out informing the taxpayer of an adjustment to the return. Not all of these returns are placed under examination.
There are three different types of audits a taxpayer may find themselves in. Once an audit begins it can move into a different audit type - where it starts is not necessarily where it stays. A Correspondence audit is done via the mail, a revenue officer does not show up on your front door step, although ignoring the letters the IRS sends you could escalate it to the point where you have a revenue officer at your front door. Correspondence audits can often be settled via mail or by calling the IRS and providing additional information requested. In the other two types of audits you meet in person with a revenue officer, either at an IRS office or at your home and/or place of business. These audits may also have correspondence via mail or over the phone. The IRS rarely communicates via email, although it does happen in the course of an audit. The first communication from the IRS will NEVER be via email, it is only once an examination is underway and the revenue officer is communicating with the taxpayer and/or a representative that this may happen.
It's important to note that although a revenue officer can show up on the front steps of your business or your home you have rights as a taxpayer. While our general approach to tax representation work is cooperative with revenue officers you can make reasonable requests as to privacy and they are not allowed to disrupt your business. We'll cover taxpayer rights in another article.