For a majority of taxpayers, the completion of a tax return is the most difficult part of the federal income taxation process. Following submission of the return and a determination of whether a refund or additional payments are due, most people are free to forget about income taxes until the following year. However, for a small percentage of taxpayers, the submission of a tax return is only the first step in a potentially lengthy process known as a tax audit.
What is a Tax Audit?
An income tax audit is the examination of a taxpayer’s federal tax return undertaken by the IRS to determine its accuracy. Federal law grants the IRS the power to examine a taxpayer’s tax return and various financial records to determine the accuracy of the return. Therefore, it’s advisable, and required by federal law, that taxpayers maintain accurate financial records in case of an audit. Without accurate records, it can be extremely difficult to substantiate the information contained in an audited tax return.
Who Gets Audited?
The method most often used by the IRS in selecting tax returns for audits is called the Discriminate Function (DIF). The DIF is a mathematical formula that classifies the error potential of income tax returns. Using this method, scores are assigned to returns, and returns with high DIF scores are flagged for review to determine if they should be audited. A second audit identification method is called the Unreported Income DIF (UIDIF), which scores returns based on their potential for unreported income. Like the DIF, the UIDIF flags returns with high scores for a possible audit.
Types of Audits
There are three primary ways in which audits are conducted: correspondence audits, office audits, and field audits. While any of these methods may be used, correspondence audits are the most common.
Correspondence Audits – Correspondence audits, typically conducted by mail, involve requests for verification of tax return information. These types of audits usually address relatively simple issues, such as requests for proof of deductions, and they are ordinarily resolved fairly quickly.
Office Audits –Office audits are normally conducted by a tax auditor at an IRS office. During an office audit, the tax auditor will request production of receipts and other financial documentation related to questions concerning a return.
Field Audits – Field audits are generally reserved for highly complex individual and business tax returns. This type of audit is conducted by IRS agents at a taxpayer’s place of business.
Federal tax law is a complicated subject, and it can be difficult to navigate the audit process alone. If you’ve been selected for an audit by the IRS, it’s imperative that you engage the services of an experienced tax attorney in order to achieve the best possible outcome. Please contact us for a free consultation at (720) 897-1550 or (888) 694-2093 (toll-free).
Posted in: Tax Law