Understanding Internal Revenue Service Audits

The IRS audits tax returns to ensure that the income tax is reported correctly.  When your tax return is audited, it does not necessarily mean that your return has an error.  If your tax return is audited, you should be aware that you have certain rights.  You have the right to representation, the right to privacy, the right to know the reason for your return being audited, the right to professional treatment by the IRS, and finally, the right to appeal disagreements. 

The IRS has several methods for selecting income tax returns for audits, including:

bulletTypically, tax filers that may have engaged in abusive tax avoidance transactions have their income tax returns audited.
bulletFor example, a number of returns are audited because the IRS receives information about tax filers who may have participated in abusive tax avoidance transactions.

 

bulletSeveral income tax returns selected to be audited are selected from computer scoring.
bulletThe computer programs generate numeric scores based on what was reported on the tax return.  One system of scoring, called the Discriminate Function System determines the likelihood that the tax return may change based on prior IRS experience with comparable tax returns.  Another score is the Unreported Income DIF, which rates tax returns for possible unreported income.  Once the computer programs generate the scores, the IRS screens the tax returns for the highest scores.  Some of the tax returns with the highest scores are then selected to be audited and certain items are determined to need further review.

 

bulletIncome tax returns that do not match the payer reports, like 1099s or W-2s, may be audited.
bulletThe IRS computers can easily cross-match social security numbers to determine whether the payer reports agree with the recipients income tax reports.  For example, if wages reported to the taxpayer by employers equals $70,000 and the taxpayer only reports $65,000 on their tax return the taxpayer will likely receive notice of the error from the IRS and will stand a greater chance of audit.

 

bulletIncome tax returns may be selected for audit if they involve transactions with other taxpayers, like business partners or investors, who have been audited. 

 

bulletOther income tax returns are selected for audit by area offices in relation to local compliance initiatives, tax preparers or particular market segments.

 

bulletMany large corporations are audited by the IRS annually.

 

If you disagree with the IRS recommended changes you have the right to appeal the decision.  You can appeal the audit findings by either having a supervisory conference with the Auditor’s manager or you can appeal your case through the court system.