An Overview of the IRS Tax Collections Process for Non-Tax Lawyers
5. Overview of IRS Examination Process – Three Types of Audits
Briefly I want to cover just a brief overview of the IRS examination process since it is one of the principal ways that balance dues are created.
With respect to audits as I mentioned earlier, there are three types of audits. There are correspondence audits, there are office audits and there are what we call field audits.
With the diminished IRS resources, the IRS is spending more and more correspondence on fairly simple issues. And even issues in the past that required some documentation like the IRS is challenging a taxpayer’s auto expense. Those audits are being handled more and more by correspondence.
The taxpayer will get a letter in the mail. The letter says, “Hi. We’re the IRS. We would like to challenge some of the information on your return. Can you please substantiate your travel expenses, your meal expenses, your auto expenses, other reimburse business expenses?” And the taxpayer will have 30 days, 45 days to provide that information. That’s a general overview of what a correspondence audit is.
A correspondence audit is handled by a local IRS employee. They will send a taxpayer a letter that says, “Hey, we’re the IRS. We would like to challenge your meal expenses, your travel expenses, your car expense. But rather than send it through mail, we actually want a face-to-face meeting with you to go over your documentation.”
The difference between an office audit and a correspondence audit is office audit generally involve issues that are fairly technical. They’re headed by a tax compliance officer versus a “revenue agent” or auditor. And the tax compliance officer is generally is a less trained IRS employee, although not always. And the tax compliance officer will conduct a meeting. They’re generally low-level issues and although they can result in fairly large liabilities, there’s something that’s fairly easily handled at a lower administrative level.
The third type of audit is called a field audit. Field audits are the more serious types of audits. Field audits are when the IRS sends personnel, usually a revenue agent, to go out in the field and investigate the tax payer.
For example, in case of under reporting or in cases where the IRS feels the taxpayer overstated their deductions, the IRS will send somebody out in the field to go do an examination of the taxpayer’s business and gather more information about them to substantiate a challenge to the return.
As a practitioner, you never want to let the IRS into your client’s business as a general rule. But there are other things that you can do to mitigate agent.