Sam Brotman, JD, LLM, MBA October 15, 2020 18 min read

What Are the Types of Tax Audits and How Serious Are They?

Obviously, if you are being audited by the IRS, you should be concerned, but you do not have to freak out or go into full-blown panic mode. Understand that an audit is a basic check. Keep in mind that due to limited resources, the government cannot audit everybody and is very picky about who it chooses to audit. 

So, the first thing to consider is that if you were selected for an audit, there must be a good reason for it. The IRS sees something in your return that makes them want to ask a question. So, yes, you should be concerned. 

You could assume that either they think that your income is not being reported correctly or that your expenses are not being taken appropriately. The very first questions you need to ask yourself when you receive the audit notice are, “Why am I being selected for audit? What is about my return that makes stand out from all the other people who filed tax returns?”

If you are selected for an audit and you cannot understand why, I would encourage you to reach out to a tax attorney or to another professional to get your return reviewed. Chances are even if you are unaware of why you are being selected for an audit an experienced tax professional will be able to review the return(s) in question and figure out why you were targeted. 

At our firm, we see the same patterns over and over again, so we can probably tell you why you were selected for an audit. Once we have a good idea of the reason, we can help you prepare for the best success of getting through the audit smoothly and minimizing any additional tax liability.

The Types of IRS Audits

There are three types of audits and vary in degree of severity. First, there is the correspondence audit. That is when the IRS finds a small error on your return and asks you to explain it. Then, there is the office audit where you go into the IRS office for a spot audit and proceed from there; either the situation is rectified or more on to a more in-depth investigation.

Lastly, and the one that is the most serious, is the field audit. That is the scenario that most people associate with an audit — when somebody from the IRS shows up at the door of your home or office.

IRS audits, or civil examinations, are conducted based upon the type of taxpayer, the scope of the examination, and the complexity of the tax return. All taxpayers are expected to provide supporting documentation with regard to questionable items. Examinations may be conducted by correspondence, telephone, or through field interview. Business returns are typically examined in an office or field interview rather than by correspondence because of the complexity of the issues involved in a business audit. In this article, I discuss the different types of audits along with their similarities and differences.

Correspondence Audits

Correspondence audits, otherwise known internally by the IRS as a Campus Examination, are the most basic type of audit. Correspondence audits involve less technical tax issues and can be completed, much like their name implies, through the mail. As the IRS notes, the purpose of a correspondence audit is to resolve tax problems quickly and easily through correspondence and/or by telephone. “[E]xaminers at the correspondence and office levels are much less invasive”.[1] The examining agent is required to process many cases without much familiarity with the return itself. It is often the case that the examiner has not reviewed the taxpayer’s file and the return after the taxpayer has replied to the agent’s correspondence. The agent will generally review the taxpayer’s file on the day of the interview.

Office Audits

Office audits, or Area Office (AO) Examinations,[2] are face-to-face audits that are conducted at the office of an IRS revenue agent. They are typically appropriate for somewhat complicated issues, which may include small business returns and complex non-business returns. Office audits may also be conducted by either correspondence and/or office interview.

In general, examination of a taxpayer’s income tax return falls initially under the responsibility of an area office where the taxpayer resides, conducts business, or maintains a principal office. The responsibility for the examination is assigned to “an examiner at the post-of-duty nearest to the taxpayer’s residence or place of business.”[3] If it becomes necessary to transfer a return to an office within another area after the examination process has begun, the convenience of the taxpayer will be taken into consideration as long as the transfer process aligns with “sound and efficient tax administration.” [4] However, what typically controls the decision-making with regard to the transfer of a case between area offices is the location of the taxpayer’s records, the purpose of principal investigative work, and where the taxpayer’s issues can be resolved most efficiently. These factors will overrule the taxpayer’s request for a case transferal.

With this in mind, a taxpayer’s case may be transferred (back) to the Area Office or between area offices. When the case is transferred, it receives audit reconsideration. “The examiner in the CRU[5] will send a case to the area examination function to be worked if the taxpayer requests a face to face examination, and/or [if] the completion of the case requires an examination of books and records, and/or [if] the CRU has not received the training to work the reconsideration issue(s)”.[6] Regarding face-to-face examinations, the Central Reconsideration Unit (CRU) receives those tax returns that were previously examined by the Area Office or Campus Examination function.

In this respect, the purpose of the audit reconsideration process is to examine those tax issues previously overlooked. For example, if “the taxpayer presents new information that was not previously considered, [IRS employees] evaluate that information and determine if a change to the assessment is warranted.”[7] The Area Office function will then make that change.

After the AO examiner receives and evaluates the taxpayer’s information, the examiner will issue a decision based upon the type of case. For example, the AO examiner may “issue the audit reconsideration full allowance (full abatement of assessment)” by completing and submitting Letter 2738 DO, which is a service letter the IRS uses when the taxpayer’s case is eligible for full abatement. The examiner may issue an audit reconsideration full disallowance letter, which means the taxpayer would not receive an abatement of tax. 

Lastly, the examiner may issue another letter, an audit reconsideration partial disallowance letter (Letter 2737 DO, Examination Report). With this letter, the examiner must send to the taxpayers two publications: Publication 3598, What You Should Know About the Audit Reconsideration Process and Publication 5, Your Appeal Rights and How to Prepare a Protest If You Don’t Agree. Taxpayers may request an appeal for full disallowance and partial disallowance determinations.

Area Office examiners have little discretion and are typically required to verify income and deductions. “A taxpayer’s inability to produce adequate records may lead not only to disallowance of the disputed items for the year at issue, but also to audits of other years’ returns”.[1] It is important for taxpayers to maintain good records.

Field Audits

Field examinations, or field audits, are used for the most complex issues. The method of the audit is governed by the difficulty of the issues. Field audits are defined as in-person audits conducted at the organization’s location, the organization’s representative office, and/or at the local IRS office.[2] There are two types of field audits: general program and Team Examination Program. The first is defined as a type of field exam conducted by a revenue agent at the organization’s location. The second is defined as a type of exam involving a team of examiners; it is more specific to large, complex organizations.

Within this context, the examining agent will function as a revenue agent,[3] who may be an accountant who works for the Internal Revenue Service. Unlike other types of examinations, revenue agents spend considerable time reviewing the taxpayer’s return. The revenue agent examines and audits financial records of individuals, businesses, and corporations to ensure tax liabilities are met. The revenue agent reviews the taxpayer’s books and records at the place of business or warehousing location. In addition, the revenue agent reviews the taxpayer’s return and related supporting documentation. 

The agent may be assisted by an engineer agent, who supports the mission of the IRS by providing “professional and accurate development of issues and efficient and effective resolutions to more significant and complex engineering and valuation issues. Engineers provide expertise to issues encountered in all types of tax returns”.[4] The engineer agent plays a key role in supporting all IRS organizations that provide for the examination of taxpayer returns.

The type of IRS audit tends to reveal much about the purpose of each type of audit and the overall strategy of the Internal Revenue Service. By learning more about the motivations behind an IRS audit, taxpayers can hopefully avoid facing the scrutiny of the IRS. If you would like to know more about IRS audits, please read my other writings, available at: https://www.sambrotman.com/category/irs-audits-and-examination/


[1] See: http://www.mbbp.com/resources/tax/irs_tax_audit.html

[2] Area Office Examination is a term commonly used in the Internal Revenue Manual, but it refers to office audits here for the sake of this discussion.

[3] See: www.irs.gov, “Part 4. Examining Process, Chapter 11. Examining Officers Guide, Section 29. Transfer of Returns Open for Examination,” 9/9/2013.

[4] Id.

[5] The acronym CRU stands for Central Reconsideration Unit.

[6] See: www.irs.gov, “Part 4. Examining Process, Chapter 13. Audit Reconsideration, Section 4. Area Office Examination,” 9/9/2013.

[7] See: www.irs.gov, “Part 4. Examining Process, Chapter 13. Audit Reconsideration, Section 4. Area Office Examination,” 9/9/2013).

[1] See: http://www.mbbp.com/resources/tax/irs_tax_audit.html

[2] See: www.irs.gov, “Charity and Nonprofit Audits: In Person [Field] Examination Audit,” 9/9/2013).

[3] Within this context, not all revenue agents are considered accountants.

[4] See: www.IRS.gov, “Part 4. Examining Process, Chapter 48. Engineering Program, Section 1. Overview of Engineering Program,” 9/9/2013).

Receive the Best of
Brotman Law

Get this topic delivered straight to your inbox.

Book an Action Plan
avatar

Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law

COMMENTS

BECOME AN INSIDER

Our best stuff: secrets, tax saving tools, and tax defense strategies from the braintrust at Brotman Law.

  • Expanded benefits during your first consultation with the firm.
  • Priority appointment scheduling and appointment times.
  • Complementary access to our firm’s concierge services.
  • Receive updates and “insider only” tax strategies and tactics.
  • And many more benefits.

Not Sure Where to Start?

Step 1 Start Here

Start Here

These ten big ideas will change the way you think about your taxes and your business.

Start Here

Step 2 Learn About Your Situation

Learn About Your Situation

Find the articles and videos you need to make the right tax decisions in the learning center.

Visit the Learning Center

Step 3 Explore Our Services

Explore Our Services

It is not just about what we do, but who we are, why we do it, and how that benefits you.

View All Services

Step 4 Get Your Game Plan

Get Your Game Plan

Meet with us to outline your strategy. No further obligation, 100% money-back guarantee.

Book an Action Plan