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.
“Examiners at the correspondence and office levels are much less invasive.” 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, or Area Office (AO) Examinations, 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.”
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.”
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.
According to the IRS, “The examiner in the CRU (Central Reconsideration Unit) 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).”
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, according to the IRS, 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.” 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.” It is important for taxpayers to maintain good records.
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.
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.
The examining agent will function as a revenue agent — within this context not all revenue agents are considered accountants — 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”. The engineer agent plays a key role in supporting all IRS organizations that provide for the examination of taxpayer returns.
Just How Serious Are Tax Audits?
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 covering IRS audits and examinations.