Every taxpayer has wondered what sort of a nightmare it would be if they were selected for an audit. However, most of the fears surrounding an audit by the IRS are irrational, and largely stem from a misunderstanding about what, exactly, an audit is. However, an audit doesn’t occur because there are any signs of wrongdoing, necessarily. Most of the time, an audit is simply the IRS checking to make sure that their records are corresponding with what you have shown. Usually, at worst, you simply give them some additional records or send money that you weren’t aware you had to pay. Here is some information about the process of an audit to help assuage your fears…
How specific returns are selected for an audit
The IRS has several methods that it uses to determine an audit. The first of these is to single out individuals that have been involved in previous tax avoidance transactions, and thus might be potentially cheating on their taxes, as well. The other major method is done through a computer scoring system. The Discriminant Function System (DIF) will indiscriminately give each tax return a score, based on the potential of unreported income. After scoring each return, screens are conducted to determine whether an audit will take place.
Aside from the computer system, irregularities between a tax return and statements from employers or banks may warrant an audit to smooth over any mistakes that have been made. Also, being professionally involved with another individual who was selected for an audit might increase your own chances of being audited (such as business partners, for example).
On top of these methods, many larger scale companies (such as corporations) are selected by the IRS to submit to annual audits.
How the IRS conducts examinations
After you have been selected for an audit, then an examination will take place. Examinations from the IRS might happen in-person with an interview and physical examination of tax records, but may also be done through mail. If in-person, then the examination may happen at the taxpayer’s home or business, or else at an IRS location or the office of a third-party accountant. These examinations may be recorded.
Contact Klingler & Assoc for help with IRS audits.