Taxpayers who fail to submit their taxes deter the country’s growth, marginalizing the inputs of many fellow citizens who pay their taxes on time. The IRS, therefore, must address and take actions on all cases of non-compliance. Among others, conducting a tax audit is one sure way of identifying defaulters; although it must be remembered that the selection of a tax return for examination does not necessarily imply that the taxpayer has defaulted or has been dishonest at the time of filing. More often than not, tax returns are randomly picked for audit, and the purpose of selecting these returns is to check if the filings are accurate and in accordance with tax laws. In fact, in a lot of cases, an IRS audit may actually lead to a refund for the taxpayer.
How the IRS Selects Returns for Examination
The IRS uses a variety of methods to select returns for audit. Let’s take a look:
- One of the ways the IRS selects tax returns for verification is by obtaining information about individuals or companies that promote or participate in tax avoidance transactions. One such example is the information received from John Doe Summons to pursue investors in tax shelters, donors of real estate, account holders, and many others.
- The IRS may also select returns based on the method of ‘Computer Scoring’. In this method, each return gets a numeric score. The IRS uses two types of scoring systems for this purpose, namely the Discriminant Function System (DIF) and the Unreported Income DIF system (UIDIF). These systems are used to calculate the ratings of taxpayers, based on the potential for change in income and for being unreported. Both the systems also consider the past filings by taxpayers. The IRS officials screen the returns that are rated the highest and select a few for the purpose of auditing and in-depth investigation of items that need to be reviewed.
- Information mismatch is another criterion when selecting a return for tax audits. In certain cases, reports such as Form 1099 – the interest statement from the bank or Form W2 from the employer – may not match with the income reported on the taxpayer’s tax return. In such cases, the IRS selects the return for audit.
- Large corporations have several transactions in a financial year, which is why the IRS examines many large corporate returns annually to verify that the same are accounted for and filed accurately for tax related purposes.
- Even in cases where the taxpayer’s return is related to an issue or transaction of another taxpayer, the IRS may select the related taxpayer’s return for the purpose of auditing both the returns. The taxpayers may be related in any manner, such as being business partners, investors, friends, or family, among others.
How Do I Know If My IRS Tax Return is Being Audited?
The IRS sends a notice by mail to taxpayers indicating the reason for the tax return audit, whether the audit will be conducted in person or by mail, the documents, the instructions on how to proceed, and contact information to use in case of queries. Keep in mind that the IRS never initiates an audit by telephone.
How The IRS Conducts the Audit of Tax Returns
The IRS audit of tax returns begins with a notice. The taxpayer is awarded a certain time period to collect, organize, and submit the requested records to the IRS. Upon receiving the records, the audits examine them for discrepancies and prepare a conclusion. The time taken to conclude an audit varies and depends on factors like the availability of information and the complexity of the issues. The audit conclusion may request no change in your tax return, agreement to the IRS’s proposed changes, or a disagreement with the IRS’s findings.
What Information Does the IRS Solicit from Taxpayers During an Audit?
As mentioned in the previous section, the IRS will send you a written request for the list of documents they want to examine. These documents are supposed to serve as evidence for the claims for deductions and credits you have requested in your tax return. It is also to verify your income as mentioned in the return. Examples of records that the IRS might request in a tax audit include bills, receipts, loan agreements, tax preparation documents, divorce settlements, employment documents, medical documents, theft or loss documents, etc.
The IRS provides a 90-day window to the taxpayers to submit the required records. In cases except those involving the ‘Notice of Deficiency’, the IRS grants a one-time 30-day extension. It is, however, important for taxpayers to submit a request for an extension by fax or mail in case of an audit by mail or contact the assigned auditor in case of an audit in person. If taxpayers fail to respond by the specified date, the IRS concludes the audit and sends you the report with proposed assessments.
Rights of the Taxpayers During an IRS Tax Audit
An audit by the IRS does not mean a punishment. The taxpayers have rights they can exercise to ensure fair treatment. The IRS details the rights of a taxpayer in their Publication 1, Your Rights as a Taxpayer. Some of these rights include the right to privacy and confidentiality, the right to courteous treatment by the IRS professionals, the right to appeal disagreements, and the right to representation.
Results of the IRS Tax Audit and the Way Forward
As mentioned earlier, taxpayers can agree or disagree with the IRS’s audit conclusion. If they agree to the proposed changes, they can choose a payment option to fulfill the balance. If the taxpayers disagree with the audit conclusion, they can either (i) file an appeal, (ii) request a conference with an IRS manager, or choose the mediation option.
A Word of Advice
If your tax return has been selected for IRS audit this year, there is no need to panic. The IRS is sensitive towards the rights of its taxpayers and strives to make sure that they are protected, however, if you think that any of your rights are being violated, feel free to contact experienced attorneys at the Law Offices of Nick Nemeth and discover what makes us one of the most credible Dallas law firms specializing in taxation affairs. You can call us at (972) 426-2553 or fill out the contact form to get in touch.
