How Does the IRS Choose Who to Audit?
An IRS audit is an in-depth review of your tax return during which the IRS makes sure you are in strict compliance with the tax law and have documentation for every deduction you claimed. If not, they will disallow it and assess you back taxes, interest, and penalties. Penalties apply if the tax deficiency exceeds the greater of $5,000 or 10 percent of the taxable income you should have reported. In some cases, the penalty applies at much lower thresholds.
The Selection Process
Most returns are randomly selected by computer screening. The IRS uses a formula that compares returns against similar returns. A “norm” is created based on the formula, and the IRS uses the information to determine who falls outside of the norm. A good tax attorney will advise you if your tax return contains any information that falls outside the norm and suggest ways to correct this before your return is filed.
If your return is chosen, then an IRS auditor or agent will conduct a review. Unfortunately, most audits these days do not have a happy ending. The reason for this is that IRS auditors are expected to interpret an increasingly complex revenue code and are poorly trained due to budget constraints. Another reason is that IRS auditors tend to take the path of least resistance. This means making decisions in favor of the IRS. Therefore, in order to achieve the result you need, you must usually appeal the auditor’s decision.
The IRS might also target returns that are related to the one they are auditing. For example, say that a business reports income paid to you on their tax return. If that business is chosen for an audit, then the IRS might choose to audit you as well. It’s not that you’ve done anything wrong. You’re simply under scrutiny because of your connection with the business being audited.
If you are chosen, then the IRS will mail you a notification. They will never call you on the phone to initiate an audit. After the initial contact, the process can either take place by mail or in-person. An in-person interview will either occur at your home, at an IRS location, at your business, or at your representative’s office.
For an audit conducted by mail, the letter will instruct you to send additional information. This can include information about your income, itemized deductions, and expenses. If it’s too much information to mail, then you can request an in-person audit.
Know Your Rights
Having a tax attorney represent you might put you more at ease with the audit process. A trusted and local Houston tax attorney can advise you on your rights and devise a plan of action. Tax attorneys are trained, experienced, and licensed to deal with IRS audits and controversies. They can also litigate in Tax Court for you if it becomes necessary.
If you or a loved one find yourself audited and are not sure what to do next, contact our office today and we can discuss your case and determine what is the best next step for you and your family.