The IRS audit process is a crucial part of tax administration. From correspondence audits to field examinations, the IRS uses various methods to ensure tax compliance. Understanding the selection criteria and red flags can help taxpayers prepare and avoid potential issues.
If audited, taxpayers have rights and options throughout the process. From to resolution, preparation is key. Disagreements can be addressed through administrative appeals or judicial channels, offering multiple avenues for taxpayers to resolve disputes with the IRS.
IRS Audit Types and Selection
Types of IRS Audits
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IRS conducts three main types of audits varying in complexity and depth of examination
Correspondence audits conducted entirely by mail for simple issues or discrepancies in tax returns
Office audits require taxpayer to meet with IRS agent at local office to review specific items
Field audits involve IRS agents visiting taxpayer's home or business to examine financial records (most comprehensive)
Correspondence audits most common type
Field audits most thorough and time-consuming
Audit Selection Process
IRS uses Discriminant Function System (DIF) to select returns for audit
Computer scoring system assesses likelihood of errors or underreported income
Assigns numeric score to each return based on statistical norms
Red flags increase chances of audit
Unusually high deductions compared to income (charitable contributions, business expenses)
Inconsistent reporting between tax years or different forms
Participation in tax shelters or complex investment schemes
IRS conducts random audits through National Research Program
Gathers data on tax compliance
Updates selection criteria for future audits
Helps identify emerging trends in tax evasion or avoidance
IRS Audit Process
Initial Contact and Preparation
Audit process begins with official notification letter from IRS
Specifies type of audit (correspondence, office, or field)
Requests specific documents or information (bank statements, receipts, invoices)