Introduction to IRS Examination
IRS Examination is often likened unto and often referred to as the IRS audit function. Typically, the IRS accepts most federal tax returns when filed. However, there are circumstances in which the IRS examines, or “audits,” to determine if reported income, expenses, and credits have been reported accurately by the taxpayer. When a taxpayer’s return is selected for examination, it is first randomly chosen by computerized screening and then secondly selected by audit by a human reviewer who decides the level of audit that the taxpayer’s return will undergo.
If an IRS Examination investigation results in a finding of additional tax owed, whether or not this is intentional or unintentional, the IRS requires the payment of a penalty in addition to the remaining tax obligation. IRS Examination determines the due date, if appropriate, for taxes reported by the taxpayer and assesses penalties and interest from the date of assessment. The Examination Division also establishes procedures for assessing and collecting tax. For more information about the IRS examination process, review IRS Publication 556: Examination of Returns, Appeal Rights & Refund Claims.
The IRS examination, or audit, process begins in one of ten service centers, which depends upon the location of the taxpayer. The service centers receive taxpayer returns; service center representatives catch errors and enter tax return data. The computer matching software the IRS uses reviews the items on the return and matches the information with sources received from other parties such as an employer or third-party filer. A tax return is scored for audit potential and a notice and demand is generated when a taxpayer may be required to pay additional taxes.
If a particular service center is unable to handle a taxpayer’s case, particularly if the taxpayer does not live near the service center, then the case is referred to a revenue agent in a local field office. The purpose of the revenue agent is to conduct a more thorough investigation of the taxpayer and the facts and circumstances surrounding their return. In some cases, the revenue agent will ask the taxpayer to come in and discuss their case and also produce supporting documents.
In some cases, the revenue agent will go into the taxpayer’s home or place of business. The revenue agent then reviews the facts, makes adjustments when appropriate, and issues a “revenue agent’s report,” which is a summary of their findings.
The IRS audit ends when the revenue agent issues a report stating either one of two outcomes. The taxpayer will either receive a no-change letter or a notice of proposed adjustments. An IRS audit may not be closed for several months following the date the taxpayer meets with the revenue agent. Throughout the period, the IRS will issue a series of letters and/or notices that require the taxpayer to respond to one or more deadlines. These letters and/or notices may come in the forms of thirty day or ninety day response times and these documents help to move the case out of the IRS examination function and into IRS collections.
Responding to one or more of these notices is important. Taxpayers are often unaware of the consequences for failing to respond to notices. In addition, the IRS is only required to mail out letters and/or notices, but the agency is not required to make sure that a taxpayer receives the notice. In other words, the IRS mails these types of documents to the taxpayer’s last known address, even if the taxpayer no longer resides there.