If you have received the dreaded notice of an IRS audit, one of your first thoughts may be, “why was I selected?” For those who have filed their taxes diligently and honestly for years, being chosen for an audit can be frustrating and downright alarming. It is important for taxpayers to understand that there are many potential ways in which the IRS determines who it will audit, and many have nothing to do with fraud or concerns of illegal reporting. Nonetheless, all audits must be taken seriously and responded to in an informed and measured manner.
IRS Selection Criteria for Audits
There are several methods the IRS uses to determine who will be subject to an audit. Audit selection methods can include:
- Purely random selection
- Prior audit results
- Third party information
- Computer screening
- Return entries
As you can see, most of these criteria do not involve an issue with the tax return or the taxpayer’s information per se. Often, a mix up internally or with information fed by a third party will result in the IRS electing to take a closer look at the return. As such, tax payers should not panic when they receive notice of an audit. Rather, it is best to remain calm and retain the assistance of a tax professional.
The Audit Process
Audits can be conducted either through the mail by a Correspondence Examination or in person. Through the mail examinations are typically more cost effective and in today’s era of diminishing IRS budgets, Correspondence Examinations may be favored. Should you receive a Correspondence Examination letter, you will need to send back supporting documents that will resolve the cited tax issue. Your tax attorney can help you with preparing a strong response that provides the information needed, without anything additional.
If an in-person review is requested, your authorized representative can typically appear on your behalf, negating your need to personally be at the meeting. An authorized representative could include an attorney, CPA, or enrolled agent. It is critical that you select the right authorized representative who will timely and appropriately respond to the audit so as to swiftly resolve the matter. Remember that failure to respond to the audit could result in harsh penalties, so take action immediately upon receipt of your audit notice.