The IRS conducted audits of roughly one million returns filed for tax year 2017, according to the 2018 IRS Data Book. Of these audits nearly 75% of them were conducted through correspondence with the remaining 25% being conducted by field auditors who conduct an in-person examination of the taxpayer’s return and records.
The most common issues audited by the IRS are business expenses claimed on schedule C, itemized deductions claimed on schedule A and underreported income. Typically, the IRS has only three years from the date the return was filed to assess an additional tax through examination.
An audit begins with a notice issued by the IRS requesting the submission, either via correspondence or in-person, of documentation to support the income, adjustments, deductions or credits claimed on the return. After the documentation submitted in response to this request is reviewed by the auditor an examination report will be issued to the taxpayer notifying them of any changes to the tax being proposed by the examiner.
The taxpayer can respond to the examination report with additional documentation in support of their position or can file an appeal. If the taxpayer submits additional documents in response to the examination report, the auditor will consider those documents and, if warranted, will issue out a revised examination report. This process can lead to a succession of examination reports to be issued and subsequent responses by the taxpayer. Once this process has been completed a final examination report will be issued.
Upon the issuance of the final examination report the taxpayer can either consent to the proposed additional assessment, appeal the proposed additional assessment or allow the examination to be closed as unagreed.
When the examination is closed without a consent to assessment submitted by the taxpayer, the IRS will issue out a Notice of Deficiency, which gives the taxpayer 90 days to petition the Tax Court to contest the proposed assessment.
If the taxpayer does file a petition with the Tax Court to contest the proposed assessment, the IRS will have 60 days to file an answer to the petition. Once the IRS answers the petition the case will typically be assigned to a settlement officer who will work to settle as many of the issues being disputed by the petition. If a settlement can be reached a decision will be entered by the Tax Court stipulating to the settlement reached. If no settlement can be reached then the case will move on to trial where the taxpayer has the opportunity to present their case directly to the Tax Court.
The audit process is a very long, arduous and technical process that can lead to the assessment of additional taxes and accuracy or fraud penalties. If you have received a notice from the IRS advising you that your return has been selected for an audit please contact a tax practitioner to seek assistance.
If you are being pursued by the IRS due to findings during a tax audit, click here to call the tax attorneys at J David Tax Law.