IRS Tax Problems

What Are the Different Kinds of IRS Audits?

7/24/2017

The phrase “IRS audit” can make even the toughest Americans curl up into fetal position just thinking about it. No one wants to see those letters from the IRS show up that imply a through inspection of your finances and possibly your living and work situations. However, the portrayal of the IRS in our media has done a great job at striking fear into our hearts at the mere mention of the word “audit”. There are four types of IRS audits and not all of them are incredibly frightening, but here are they are in order of severity.

Correspondence Audit

No matter what type of audit you are under, the IRS will never initiative an audit over the phone, through email, or turning up at your doorstep thanks to the Internal Revenue Service Reform and Restructuring Act of 1998. You will always get written notices in the mail concerning your taxes.

Subsequently, correspondence audits are done by mail and are also referred to as “desk audits” since most of the time, they don’t involve leaving one’s desk. Correspondence audits are usually done when there’s just one specific item on your tax return that the IRS wants to examine more closely since it’s not worth sending an agent out for something you can easily do by mail. You’ll be ask to submit proof of your deductions or other claims on your tax return via mail, such as letters from a charity if you made a big donation or receipts for business expenses.

Office Audit

Office audits are requested by the IRS when they have more questions about the items on your tax return. You will be summoned to an IRS office by mail to provide more information about your tax situation. While office audits involve facing IRS staff and are more intense than correspondence audits, they are not as intense as a field audit and are usually over the same day.

You may have to provide substantiation for multiple areas of your tax return, in addition to giving more detailed answers than you would in a correspondence audit. The agent conducting the audit will give you some time if they request additional information, but you will need to have your documents ready before the office audit if they concern the items outlined in your audit request letter.

Random Audit

The official name for this type of audit is much longer, the Taxpayer Compliance Measurement Program (TCMP) audit but most refer to it as the “random audit”. This is because selection for this type of audit is completely random. The IRS needs to collect statistics by analyzing a very large sample of tax returns (typically up to 50,000 in any given tax year) and intensively audit them every couple years.

While the selection criteria is completely random, unfortunately the process for random audits is not. It's nowhere near as gentle as an office or correspondence audit since the IRS analyzes every single line item in your tax return and will request that each item is completely backed up by documented proof.

Field Audit

Field audits are the most intense, and seen by many people as the most intrusive, as they involve IRS agents visiting your home and/or place of business. The purpose of a field audit is namely to see if the various things you've reported on your tax return add up such as the number of children who live with you and are claimed as dependents. If you work from home and claimed the home office deduction, the agent definitely wants to see if your workspace meets all the requirements.

More than one area of your tax return may be examined and you will be expected to substantiate any claims you made if the agent isn’t satisfied with what they found upon inspecting your home and/or workplace.

How Far Back Can the IRS Go if They Audit Me?

If the IRS decides to audit you for multiple years, which is often the case if there is a major discrepancy in your income and/or deductions year-over-year, they can go back up to three years for personal tax returns and six years for business. This includes self-employment reported with your personal taxes, so you definitely want to keep all of your records where you can find them easily dating back to the past six years.

What Would Trigger an Audit?

Aside from major year-over-year discrepancies and the random audits done for gathering statistics and setting the IRS’ DIF score, self-employed taxpayers are the most at-risk group for being audited. Expenses that have highly personal elements like travel, meals, entertainment, using your car for business, and home office expenses are major audit targets. You need more proof for these items than merely proof that you paid for them: what was the purpose of the meal or trip? The benefits don’t have to be immediate, but you need to be able to prove traveling to meet a colleague was really necessary.

If you have large itemized deductions (e.g. charitable donations, real estate taxes, miscellaneous deductions reported on Schedule A) it is also frequently a red flag because people often overstate how much they donated or fail to properly report offsets of state and local income taxes paid.

Always keep diligent records and hold onto them for at least six years in a place you can easily find them!

Lee Reams II, writes for TaxBuzz, a tax news and advice website. Reach him at [email protected] or on LinkedIn.

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Lee Reams II

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I am a tax and business news junkie who has spent the last 20 years developing and executing "best in class" word-of-mouth marketing campaigns for tax and accounting professionals. With TaxBuzz and CountingWorks we have taken that same commitment to quality content directly to the consumer. Keeping you up-to-date with the latest tax law changes, business growth tips and planning strategies to help you reach your best financial outcome.

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- Professional Judgment: TaxBuzz AI is a tool to aid tax professionals in research and analysis. It is not a replacement for professional judgment, and users should exercise their expertise when interpreting and applying the information generated.
- Consultation with Experts: While TaxBuzz AI provides valuable insights, it is crucial to consult with legal and tax experts to ensure the advice aligns with the latest legal developments and specific nuances of a particular situation.
- Verification of Information: Users are responsible for independently verifying the information provided by TaxBuzz AI, especially in instances where the advice generated is critical to decision-making.
- Educational Purposes: TaxBuzz AI is intended for educational and informational purposes only. It is not intended to provide specific legal or tax advice tailored to individual circumstances.
- Non-Endorsement: The use of TaxBuzz AI does not constitute an endorsement or guarantee of the accuracy of the information provided. Users are encouraged to corroborate the advice with other reliable sources.
By accessing and using TaxBuzz AI, you agree to abide by these terms and acknowledge the limitations outlined herein. We reserve the right to modify these terms at any time, and your continued use of TaxBuzz AI constitutes acceptance of any such modifications. If you do not agree with these terms, please refrain from using TaxBuzz AI.

TaxBuzz.com is a service of CountingWorks, Inc., 2549 Eastbuff Drive., #448 208, Newport Beach, CA 92660

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