No matter who your client is, a letter from the IRS will likely bring the following reaction – panic. Even if the letter tells the client that their refund is larger than originally expected, the first reaction on seeing the letter is fear.

There are a host of reasons why a letter may be sent, but one of the most dreaded is a letter informing the client that a personal or business tax return has been selected for audit.

This article is the first in a four-part series that contains information about the audit process that can help reduce anxiety during the IRS’ audit examination. In parts two, three, and four, Teuber will address the appeals process, the tax court process, and the tax collection process.

Who conducts the audit?

An audit will be conducted by the Examination Division of the IRS. Most often, contact will be made by a Tax Compliance Officer or a Revenue Agent. Both are auditors charged with confirming the accuracy of items found on a tax return.

A Tax Compliance Officer is generally restrained to an IRS office and conducts an audit from his or her desk. A Revenue Agent is often a more experienced auditor that travels into the field to examine records and to confirm whether the tax return’s representations are consistent with what is found during a site visit. Neither type of auditor, however, is ultimately concerned with the person’s or business’s ability to pay the tax asserted. Their focus is simply on the determination of what they believe is the proper amount of tax due.

Are there different types of audits?

When an audit occurs, it will generally fall into one of three categories: (1) a compliance center audit; (2) an office audit; or (3) field audit.

A “compliance center audit” is conducted by letter. These audits often arise as a result of a discrepancy in information found on a tax return and information that the IRS has received from a third party. Such audits may arise if a 1099 has been issued under a client’s social security number but the income reflected on the 1099 was reported under a business’ Employer Identification Number.

An “office audit” may also be a correspondence audit but may involve a visit to a local IRS office. These audits are typically limited to certain specific issues on a specific tax return. Such audits can often be resolved by letter providing additional information and explaining that the item at issue was properly reported.

A “field audit” will take place at a taxpayer’s place of business or at a representative’s office. Field audits are not limited to specific issues or tax years and often may involve an examination for all years open under the statute of limitations. These are the audits that typically bring the greatest fear to the client.

Moreover, the presence of an auditor at a client’s place of business has the potential to upset the operation of the business. For this reason, it is often preferable to conduct the actual examination of records at a representative’s office. Most auditors are comfortable with accommodating this arrangement; however, they may still ask to conduct a site visit.

What type of information must be provided?

When the IRS conducts an audit, it will request information by several means, including information document requests (“IDR”), summons, third-party summons, or a taxpayer interview. Having command of all of the relevant facts will allow a client’s representative to best respond to the IRS’s information requests.

An IDR is a written request for information that typically asks for specific documents, outlines certain categories of documents desired and lists certain questions that the IRS has concerning a tax return.

When the IRS issues a summons, it is making a more forceful request for information that can be enforced in a proceeding in the federal district courts. This gives the taxpayer an opportunity to challenge the summons on certain grounds. Similarly, a taxpayer has the chance to challenge summonses issued to third parties. Taxpayer interviews can only be required following the issuance of a summons.

Knowing what information the IRS is looking for provides an understanding of the tax issues in which the IRS has interest. Armed with this knowledge, a taxpayer can respond to the IRS by providing justification for how an item was reported on the tax returns under audit.

A failure to respond should generally be viewed as an undesirable audit strategy. The failure will invariably lead to asserted increases in the tax liability of a client that could be avoided by working with the auditor. On the other hand, a client should consider whether it wants to turn over information that was not requested. Providing more information than was asked for can lead to audit adjustments in areas that the IRS auditor had not previously considered.

What happens after the audit?

Once an audit is concluded, the auditor will issue a report of his or her findings. These items in the report may be resolved with the auditor based on the tax laws. The auditor is not supposed to resolve the case based on the chance that the IRS could ultimately lose the issue in court.

These hazards of litigation may be relevant further down the line in the administrative process, but are not to be considered at the audit level. If a resolution cannot be reached, the auditor will issue either a “30-day” or “90-day” letter that provides the taxpayer an opportunity to settle the case with the Appeals Division of the IRS before having to proceed to court.

About the Author

Robert B. Teuber is a tax attorney with Weiss Berzowski Brady LLP in Milwaukee. He works with individuals and businesses in resolving tax audits, appeals, litigation and collection actions brought by the IRS and Department of Revenue. Rob can be reached at (414) 270-2538 or at rbt@wbb-law.com.

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