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IRS AUDITS

 

What is the Examiniation (Audit) Process?

An IRS Examination is a process of reviewing and examining a taxpayer's accounts and financial information to determine whether the total amount reported is correct. Examinations include hiding income overseas, filing false tax returns, abusing tax-exempt organizations, misusing retirement plans, concealing ownership of a company, submitting false wages or income, and abusing trusts. In practice, the scope of IRS investigations can be large or small in an accountant's experience. In terms of financial information, we have seen the IRS pull out 10 years of credit card information and inquire about the source of funds one by one, and one cannot help but be impressed by its meticulousness.

 

Selection of Targets for Checking(Note)

If a tax return is randomly checked, it does not necessarily mean that the return is incorrect. How the IRS conducts random checks includes the following five methods:

 

  • Random selection and computer screening: Sometimes the IRS will select returns based on a computer statistical program. The computer program assigns a “score” to each tax return. The Discriminant Function System (DIF) score evaluates the likelihood of change based on similar IRS tax returns in the past. The Unreported Income DIF (UIDIF) score evaluates the likelihood that a tax form has unreported income. IRS agents filter the highest-scoring tax forms, select some of them for review, and identify the items on those forms that are most likely to need to be reviewed.
  • Document Comparison: When the source information, such as W-2s or 1099s, does not match the information reported, the IRS may identify such returns for review after comparing them.
  • Related Party Investigations: If a person with whom the taxpayer has income or transaction dealings is sampled, such as a business partner or a personal corporation, then the taxpayer may be sampled as well.
  • Notifications from various agencies or whistleblowers: Some tax forms are selected for examination based on information obtained by the IRS through the identification of fraudsters and participants in abusive tax evasion practices. Examples include information obtained from John Doe Summonses, which are court-ordered subpoenas issued to credit card companies, correspondent companies, participants, etc., on a list of fraudsters, requesting that the information be forwarded to the IRS.
  • Large Corporations: The IRS examines the tax returns of many large corporations each year.
  • If the IRS conducts an audit, they may do so by letter, in-person interview, or by reviewing the taxpayer's information. The interview may take place at an IRS office, or at the taxpayer's home, office, or accountant's office, and the IRS will tell the person what records the examiner needs. The IRS will also tell the person what records the examiner needs, and the results of the examination may remain the same as the return or may need to be adjusted; if adjustments are needed, IRS agents will explain them to the person.

 

Length of Time for Audits

The length of each audit varies depending on the type of audit, the complexity of the items being audited, and the ease with which the information can be obtained.

 

Required Records

The IRS will provide a written letter to the taxpayers regarding the required documents.

The U.S. tax law obligates the client to keep records of the source of the figures on the return at the time the return is prepared. Generally, the records mentioned above should be kept for three years from the date the tax return was filed.

 

Results of Audits

There are three types of checking results:

 

  • No change: The result of the audit is the same as the taxpayer's return, with no changes.
  • Agree to Change: When the IRS determines that the taxpayer's tax liability should be changed, the taxpayer understands and agrees to the change.
  • Disagree to Change: When the IRS determines that the taxpayer's tax liability should change, the taxpayer understands but does not agree to the change.
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What happens if the taxpayer agrees to the IRS's proposed change?

If the person agrees to the results of the audit, the person will be asked to sign a document, which will be in a slightly different form depending on how the audit was conducted.

 

What happens if the client does not agree with the result of the search?

The client can request a meeting with the IRS agent'ssupervisor to initiate a further review. In addition, the taxpayers can request a summary mediation or appeal the results of the audit.

 

The IRS website has a collection of frequently asked questions about tax audits.

IRS audits | Internal Revenue Service

 

Conclusion

Taxpayers should make it a habit to keep their tax returns. If you hire an accountant to help you file your tax return each year, you should confirm the contents of your return before filing. In this way, if the IRS requests an audit, you will not be left with no information to provide.

 

Copyright: This article is original and copyright © Alphakey Advisory LLC. This article may not be reproduced, copied or used in any way, in whole or in part, without permission. The information provided here is general in nature and should not be regarded as legal, accounting, or tax advice from Alphakey Advisory LLC. Readers are advised that this material may not apply to or suit their specific circumstances, and additional considerations—both tax and non-tax—may be necessary before undertaking any action based on this content.