The 4 types of tax audit that you may face with the IRS
Types of Tax Audit: 4 Different Types of IRS Audits & Purposes
Many taxpayers elicit panic and break out in a sweat after receiving an audit letter from the IRS. They don’t think “What kind of audit?” Most people are unaware there are four types of IRS audits or that the commission selects tax returns based on several somewhat complex references.
According to tax laws, the Internal Revenue Service audit examines an individual or organization's financial information confirming income and tax deductions accuracy.
While some IRS audits come with penalties and fines, some are no big deal. After learning about the type of IRS audits, you'll better understand what's involved. In the article following, we discuss IRS Audits and their purpose more in-depth to improve your knowledge and maybe relieve your stress.
What are tax audits?
A Tax audit, also known as a taxpayer examination, is the review process of an organization or an individual's tax return for accuracy on all reported data. The tax auditing process involves the Internal Revenue Service examining financial information and accounts for income and deductions information authenticity. Why does the IRS audit? The primary purpose of tax auditing is to find omitted revenue reports.
The commission must double-check the accuracy of your numbers to ensure there are no discrepancies on your return. Indeed, the IRS audits thousands of individuals and organizations for various reasons, but the chances of setting you apart for closer scrutiny are relatively low.
The commission audits some taxpayer information on a statistical formula and others based on suspicious activities. So, nothing is frightening about the Internal Revenue Service tax auditing process, and you have nothing to worry about if you're telling the whole truth.
Taxpayers file returns electronically or by hand while the commission enters the information into a computer system. Then, the IRS assigns numeric scores, also known as the Discriminant Function System (DIF) score, to determine who has a tax liability.
How many different types of tax audit are there?
There are three significant types of tax audits that vary in severity. What taxpayers encounter depends on the tax return information gathered by the Internal Revenue Service. First is the correspondence audit. If the IRS sends you a letter requesting documentation or proof of the statement, your account has an ongoing correspondence tax audit.
The commission may request this essential information to verify your tax return data. Employee and moving expenses, alimony, and casualty losses are a few pieces of information the IRS can demand to clarify a portion of your tax return in a correspondence audit.
The second is the office audit. This type of tax audit refers to the commission requesting an in-person meeting to clarify your tax data. In this case, you need to visit the Internal Revenue Office after receiving a letter of invitation if you have a complex case. If you are invited for this kind of review, it would be a good time to consider getting IRS tax audit representation.
You'll get the invitation letter if your submitted information has multiple deficiencies that the correspondence audit cannot fix. Most taxpayers operating as a proprietorship business receive this letter due to unusual ongoing transactions, and the commission requires clarification.
You will meet an IRS auditor for a face-to-face meeting in a field audit. Remember to contact and hire a IRS audit lawyer if you receive a field audit letter from the commission. If they choose, the commissioner can visit your tax attorney’s office to discuss the details of your tax return.
If your business has an inventory, the auditor may require your records for a review at the business location. While the these different types of tax audit are similar, they all need your undivided attention. Next, we will be dealing with the four sub IRS audit types.
What are the 3 types of audits?
The three main audit types are internal audits, external audits, and Internal Revenue Service (IRS) audits. Certified Public Accounting (CPA) firms perform external audits while a company's auditor handles internal audits. But the Internal Revenue Service audit focuses on specific transactions that carry a negative connotation from the taxpayer.
What is the difference between an IRS examination vs audit?
Many taxpayers use the words IRS examination and audit interchangeably, but there are differences. While both require positive assurance and independence, they differ from one another. We'll discuss a few differences below:
The IRS tax examination involves evaluating a company or an individual’s non-historical information on finances. An audit focuses on historical financial information required to verify information on tax returns. Furthermore, tax examinations undergo Standards for Attestation Engagements.
An audit for public companies is subject to the Public Company Accounting Oversight Board (PCAOB) and Statement on Auditing Standards for private companies. The Internal Revenue Service examines taxpayers' returns for various reasons.
For example, the commission compares information, samples them randomly, or goes through a discriminant function system to determine which taxpayers to audit. The discriminant system is the Internal Revenue Service's computerized method for scoring tax returns for individuals.
If your score rating is high, your documents go through a manual review by an examination agent to determine the need for an audit. You may get a letter of invitation to visit the local IRS office for another review after this process.
Remember that the audit's nature determines the tax examination location while you get a notice specifying areas that require verification. Bank deposit records, financial statements, and total income are likely areas the IRS wants to examine for discrepancies.
If there is a red flag in your documentation, the commission may scrutinize you during the examination. The commission has three years to decide the number of mistakes in your documents, and if discrepancies exceed 25%, the IRS can examine your return for six years.
The audit process for taxpayers results in a disagreement or agreement with the Internal Revenue Service. If there are no negative connotations in your documents, the IRS accepts your return as original during the audit. But if there is a discrepancy, the commission lets you pay the debt through a mutual agreement.
In a tax examination case, penalties may arise based on the taxpayer's underpayment. After examination, taxpayers may face severe penalties, including prison time for tax-related severe cases.
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What are the different types of IRS audits?
The correspondence, office, field, and Taxpayer Compliance Measurement Program audit are types of the Internal Revenue Service audits. These IRS tax audit begins when the commission requests more information on taxpayers' returns. The kind of audit you get determines the result. In this article, we discuss the different types of IRS audits. We will also briefly touch on the IRS audit process timeline with each audit type.
IRS correspondence audit
The Internal Revenue Service correspondence audits, also known as a Campus Examination, represent nearly 75% of the commission's tax investigations. The IRS comes across various concerns, problems, and issues with corporate and individual tax returns that require a solution.
While IRS correspondence audits are the most basic type, they resolve fewer technical tax issues with individuals and organizations. This IRS audit type is typical for non-profit and philanthropic companies with simple matters involving small amounts.
As the name implies, the Internal Revenue Service conducts correspondence audits via mail. Moreover, correspondence audits helps the IRS quickly resolve taxpayers‘ return problems through the mail or telephone. Taxpayers receive a 566 letter with a Schedule C form requesting additional information on returns from home office expenses or charitable donations.
For example, the IRS may request your auto expense receipts to verify your claims and justify your deduction. The Internal Revenue Service request to evaluate and verify your documentation and receipts for accuracy. The Internal Revenue service will close correspondence audit cases when the taxpayer provides adequate proof to resolve the issue.
The commission gives taxpayers 30 days to respond. Failure to reply may result in penalties, fines, and interest. Usually, you'll get another letter detailing the commission decision with an appeal option after the letter with accurate documents and evidence.
Many taxpayers get scared at the mention of the word “audit,” but the IRS only wants additional evidence to ensure accuracy. While correspondence audits are straightforward, taxpayers can complete the process three to six months after providing the necessary evidence.
After receiving a notification from the commission, consider visiting a tax attorney if you're unsure of the best way to respond. Hiring a tax attorney may be your best solution for professional advice on handling the correspondence audit letter.
Many tax professionals believe that you have zero problems after receiving this letter of documentation if you didn’t commit any tax fraud. But if the reverse is the case, a tax attorney can help you avoid penalties, interest, and fines from the IRS. While the IRS handles correspondence audits via mail, below are letters taxpayers receive:
The Simple Letter
Taxpayers receive a simple letter from the Internal Revenue Service detailing the debts owed to the government. While this message is not a technical audit, it requires a response for a quick resolution. This IRS letter can result from an omission of income or a math error on your tax return, which we will discuss further.
The commission might send a simple acknowledgment letter if you made a math mistake on your submitted tax return. For example, if your income is $3500, but you reported $3000 or $500 due to mathematical error, you owe the omitted tax. Consider replying and rectifying the case after receiving the simple letter from the Internal Revenue Service indicating the error.
Omission of Income
Many independent contractors and investment companies fill out the 1099 and W-2 Forms for tax purposes. But mistakes are inevitable, so if you omitted income on any of these forms, you'd receive a letter from the commission.
After receiving this letter, consider owning the faults and pay the debt with incurred interest or penalties before the tax due. Or disagree with the letter and file for further examination with evidence via mail or telephone and contact a tax professional for the best advice.
The Audit Letter
The Internal Revenue Service's audit letter will demand specific documentation and evidence supporting deductions on your returns. Most taxpayers receive this letter because the commission wants to see a formal acknowledgment of the charity donation and deducted amounts.
Consider mailing the commission your credit card receipt or evidence to support your claims. But if there are no proofs to support your claim, consider paying the debt and close the case. While paying is not your only option, you can argue your point through litigations or the commission channels.
IRS Office Audit
IRS Office audits are face-to-face meetings conducted at the Internal Revenue Service office. This meeting is a severe audit form, and a swift response is essential for a quick resolution. If you have issues with itemized deductions, business revenue, or rental income and expenses, it may result in an IRS office audit.
While the initial notification for this audit comes via mail, taxpayers need to visit the Internal Revenue Office to meet agents after receiving the invitation.
The letter contains the examiner's contact information and details of the meeting to streamline the process. Furthermore, the letter prepares taxpayers and includes the information required to present at the audit meeting. There's no reason for panic as this audit focuses on specific areas of your return.
The IRS resolves complicated tax issues involving small business or non-business returns with these meetings. The commission usually assigns the office audit responsibility to an examiner duty post close to the taxpayer's residence or business location.
The meeting can be held at a designated office on a particular date for easy document access. Although an office audit is more elaborate than its correspondence counterpart, taxpayers often complete the process in a single session or day.
Consider heading to this meeting with your bank statements, retirement plan documents, business income tax returns, etc. The process is straightforward, but it can take additional time if the examiner asks for supplementary documents.
Remember that the commission cares about taxpayers' convenience, and you can reschedule with the examiner's approval. Furthermore, you can transfer the meeting to another area, even after starting the proceedings but with proper communication with the examiner.
You can facilitate the meeting at an office within another area as long as it aligns with the auditor. The location of the taxpayer's documents plays a significant role in the transfer of meetings between offices. Furthermore, other determining factors are the locations where taxpayers can efficiently access information to resolve the issue.
The idea is to inform the IRS manager in the Central Reconsideration Unit (CRU) of your reasons with evidence. The IRS requires an office audit if your submitted information has multiple deficiencies. IRS agents examine the tax issues and demand proof and evidence supporting your claims.
There'll be another evaluation round if you support your claims with new information omitted from the pre-existing submitted data. After a thorough assessment, the agent determines your documents' accuracy and decides if it's worth incorporating into your file.
After proper evaluation, the examiner will issue a decision based on your case type with an appeal option. If your case is eligible for audit reconsideration, you'll get a service letter indicating it. This audit may result in zero changes in your return or even reveal that the Internal Revenue Service owes you a tax refund.
If you fail to produce adequate records and supporting evidence, you may get the IRS disallowance letter, including fines and penalties. The examiner's decision may include unpaid taxes and levy owed, but taxpayers can request an appeal for further reconsiderations. An unfavorable result is not the end of the world. You may win your appeal with an experienced tax attorney by heading to a tax court within the statute of limitations guideline.
IRS Field Audit
The Internal Revenue Service field audits, also known as field examinations, are another comprehensive process that terrifies many taxpayers. Field audits involve in-person meetings with IRS auditors or agents at the taxpayer's residence or the company's representative office or place of business.
Furthermore, the commission can send a letter for a meeting at the local IRS office to clarify tax issues. Knowledgeable and experienced Internal Revenue Service agents perform field audits better than other representatives, and a tax attorney may be your best solution. Remember that these revenue agents specialize in different industries, and an experienced tax attorney is an ideal match.
When the Internal Revenue Service agent visits your home or business location, they may demand your revenue records. Furthermore, these agents can ask for other things outside your records but related to your tax case.
IRS examiners do not limit investigations to certain areas, so prepare necessary documents before their arrival for effectiveness. Team examination and general program are the two field audits taxpayers will encounter with revenue agents.
The in-person meeting that holds at an individual residence or business location is an Internal Revenue Service general program. The team examination program involves a combination of examiners and is more specific for complex and large organizations.
The IRS field audit agent usually demands financial records of corporations, businesses, and individuals to ensure data accuracy on their tax returns. A typical field business audit includes reviewing finances, interviewing employees, and taking a tour of the organization's facility.
Interviewing employees help the Internal Revenue Service agents understand the business structure, internal controls, and accounting procedures. Furthermore, these examiners evaluate taxpayers' business records and even mail audits.
During an individual field audit, the agent is more interested in reviewing the taxpayer's financial records. Meanwhile, this audit usually lasts between 2 hours to one week, depending on your account's complexity.
If your business has an inventory, the examiner would demand the records to ensure accuracy. Most Internal Revenue Service agents observe and review inventory records and may penalize you for inaccuracies. Agents involved in IRS field audits are efficient and can effectively find a resolution to complex issues.
They provide expertise to different issues encountered in various tax-related issues. Remember that field audits are more severe and intrusive than other audit types. So, if the commission decides to field audit your finances, it's time to hire a tax attorney.
Ensure legal representation is present during your tax preparation and meeting, as revenue agents may use your words to expand the auditing scope, which can be tiring. Talk with your tax attorney to advise whether your CPA can communicate with the Internal Revenue Service agent without accidentally broadening the scope of discussions to avoid unnecessary fines or penalties.
The Internal Revenue Service examination branch intermittently conducts Taxpayer Compliance Measurement Program or TCMP audits. The IRS performs this tax audit to ensure taxpayers comply with tax laws and update the Discriminant Function System data.
While a regular Internal Revenue Service audit requires a portion of taxpayers' documentation, the TCMP audit requires complete documentation. The IRS requires full documentation for this audit to ensure the validity of the taxpayer's income and expenses on the submitted form.
This can sometimes be expensive as taxpayers require a tax attorney's service. The method may also be time-consuming if taxpayers are not well organized or do not have necessary documents available at request.
The Taxpayer Compliance Measurement Program can become unpleasant for many taxpayers, especially with the quality and complexity of record-keeping. Remember that the Internal Revenue Service chooses the TCMP subjects based on data from the Discriminant Function System (DIF) scores.
The commission develops these scores by examining and analyzing a group methodically and in detail. While the group usually involves over 50,000 random selections for intensive audit, the Internal Revenue Service does it every few years.
The IRS created a statistical database that determines its enforcement focus for smooth operations. This database ensures that the Internal Revenue Service audit selection remains random.
In a Taxpayer Compliance Measurement Program audit, the IRS analyzes every detail of taxpayers' returns and validates the data with accurate documentation. The commission usually demands bank statements, contract documentation, invoices, and receipts from taxpayers at this auditing level.
These documents would prove your claims and help your case beyond doubts if the data are accurate. The Internal Revenue Service audits every taxpayer return line and requires documentation for every item and not a portion of it.
Consider heading to the IRS office with all your records well-organized. Taxpayers who cannot provide the necessary documentation to prove their case beyond doubts may attract fines and unnecessary penalties even if their claims are valid.
Documentation and receipts are essential to the IRS, and keeping and presenting them when necessary will help you. While the process can be rigorous for many people, it only takes a few hours for some taxpayers.
The Taxpayer Compliance Measurement Audit Program is a long-time secret that continues to help the commission determine who to audit. A typical taxpayer with charitable deductions, stock or mutual fund investment, salary, and kids may take three to four hours to go through the audit.
Remember that your scores will determine if the Internal Revenue Service should invite you for auditing. This method is a top-secret and intensive program, but taxpayers can streamline the process by getting necessary records ready before meeting with the revenue agents.
Whichever audit invitation you get from the Internal Revenue Service, you need good organization and a calm mind to approach things. Consider gathering your receipts, checks, and necessary information related to questionable items in sequential order for a quick resolution.
Also, we cannot overemphasize the need for a tax attorney for professional advice before you meet with IRS agents.
CP2000 notice, also known as underreported inquiry, is a letter sent to taxpayers when discrepancies are in the W-2 and 1099 forms. Many taxpayers get this notice because the payment or income details on the Internal Revenue Service file differ from the tax return information.
If your tax return data differs from the income information on the IRS file, the commission sends a CP2000 notice. Furthermore, the discrepancy may decrease or increase your tax or even have zero effects, but the Internal Revenue Service must verify all information for accuracy.
The CP2000 notice provides taxpayers with the necessary information to determine the proposed changes on the tax form. This generated letter proposes possible penalties and taxes taxpayers owe for omitting vital details on the return.
Remember that the Internal Revenue Service can question credits and deductions with different information on your statement. The IRS file this statement with your social security number (SSN) and sends you a notice request for valid data.
But the notice is computer generated and is not always correct. Many taxpayers who receive this notice and pursue the case owe the government no money. So, there's no need to panic when you receive this letter.
Your first task is to contact a tax professional or certified public account for tax preparation before replying to the commission within the required time. Ensure the tax professional is aware of the process as you move further for a quick resolution.
Start by evaluating your position and decide on the proper response. Validate your taxes by checking the reported income figures on your tax return. Combine the information statement on your SSN and compare the business tax details.
Consider calculating additional taxes you owe, and you'll know if you agree with the received letter or not before responding to the IRS. If you agree with the letter details, consider replying to the IRS with a payment or demand for an installment agreement for the tax year to avoid further sanctions.
Should you disagree with the letter details, you still need to reply but consider stating your position on the matter. State your position and attach documents supporting your claim to clarify the issue.
If the commission accepts your claim, you'll get a notification correcting your return. If the reverse is true, you'll get a rejection with an appeal option. After eight weeks, consider calling the commission's local office to confirm the best way to resolve the issue.
It’s best to analyze your information statements to avoid future returns. Do not submit incorrect information on your deductions, income, and expenses to the Internal Revenue Service.
If you made an error while filing your return for the tax year, your best solution is payment when the commission sends a letter regarding the issue.
Need help with a tax auditing issue?
After receiving an audit letter from the Internal Revenue Service, many taxpayers go into panic mode. While the commission can invite any taxpayer to participate in an audit, everyone has a right to appeal.
Having a knowledgeable and experienced tax attorney can save you from the Internal Revenue Service fines and penalties associated with tax auditing. A lack of quality representation during the tax audit process can lead to catastrophic losses, especially against highly skilled revenue agents. Before you respond to the IRS, call the tax attorneys at Brotman Law.
Retaining Brotman Law is your best solution to resolving tax auditing issues with the IRS.
The tax professionals at Brotman Law have successfully advocated for individuals and businesses with the commission for years.
Final points about the different kinds of IRS tax audits
Although dealing with the Internal Revenue Service tax audit can be a catastrophic experience for some taxpayers, there is an option to appeal. While the appeal result depends on the type of audit letter taxpayers receive, there is always a chance for success. If a taxpayer appeals to the IRS decision without the necessary documents as evidence, there may be penalties and fines.
If you receive a notice of audit from the IR, before you start to panic or write the government a check, contact a tax attorney. Firms like Brotman Law specialize in IRS tax audits and can give you added leverage with any kind of tax audit you have.
Which type of audit occurs at your home or business?
The Internal Revenue Service field audit occurs at home or business locations because it requires face-to-face meetings. These audits are in-depth, so the IRS interviews the individual to clarify discrepancies in taxpayers' returns. The IRS agents will review your present and past financial statements for accuracy during this audit.
Furthermore, revenue agents can observe your business location and assess your business during field audits.
What is the most common IRS audit type?
Correspondence audits are the most common IRS audit types. The Internal Revenue Service conducts this audit to request additional documentation from taxpayers. The commission performs this audit via mail or telephone and taxpayers. Unlike other IRS audit types, taxpayers do not need to meet revenue agents to clarify issues with correspondence audits.
Contacting the IRS Tax Audit Department
The IRS operates an assistance center office that enables taxpayers to contact tax auditors for quick resolutions. The IRS has offices in every state, so consider visiting their website for tax auditors' contact details. However, the IRS tax audit department's contact for individuals is 800-829-1040, and businesses can contact 800-829-4933.
For gift tax or estate questions, contact 877-829-5500. While you can contact the IRS tax audit department by phone, other options include the mail or online at IRS.gov to answer basic tax questions.