Taxation Law—IRS Audits

Internal Revenue Service (IRS) audits can lead to huge tax liabilities not to mention in certain cases a referral to the IRS' Criminal Investigation Division. Do not take any audit lightly!

First Audits are divided into three types:

In the IRS office audit
A field audit, held at your home or place of business (or if requested at your attorney/CPA/accountant's office)
A Taxpayer Compliance Audit
Correspondence Audit

The IRS office audit is generally the easiest, but has certain aspects that make it difficult. Usually a notice is sent from the IRS requesting specific documents and your appearance at the nearest IRS office for an appointment. These audits are easiest because you know exactly what the IRS is looking for and what the problems might be. However, these audits often are conducted by less-experienced IRS employees who may not be conversant with the nuances of the law and deny deductions rather than allow them. For this reason this type of audit frequently ends up going to Tax Court.

The next type of audit is the Field Audit. The IRS will send you a letter and inform you or your business that they are going to your home or office to conduct the audit. These audits are conducted by more experienced and higher level IRS auditors who are better at spotting missing and erroneous information. You must be very well prepared for these types of audits. One problem with the field audit is that all of your records are at the disposal of the IRS and they will ask for virtually any kind of information. It is very advisable for you to have the audit conducted at your tax attorney's office. Under certain circumstances the records are privileged information and do not need to be turned over to the IRS.

The third type of audit is the "taxpayer compliance audit." This audit is the most thorough of all of the IRS audits. It is conducted in the field at your home or business. These audits are used by the IRS to make computer profiles of individuals/businesses who will be audited in the future. These audits are only conducted by senior and experienced IRS auditors. The information they request traces where income came from and where and how it was spent (all kinds of income cash, checks etc.). Once the audit is over, the results are final unless you decide to appeal or go to Tax Court. Approximately 1 in 2,000 people experience this kind of audit.

The final type of audit is the Correspondence Audit or sometimes called the "matching audit", the IRS receives W-2s and 1099 forms. These forms are from employers, from banks where you have earned interest, stock brokerage houses where you have sold stock and so on. Now, the IRS matches these amounts with the amounts you have put on your tax returns, if they do not match up you'll get a bill from the IRS. Often these "audits" are riddled with mistakes.

The IRS can audit you 3 years from the date that you filed your tax return (or April 15, which ever is later) . However, if you have distorted your income or deductions by more than 25% then the IRS has 6 years to audit you.

Disclaimer: The information in these web pages has been prepared as a service to the community and does not constitute legal advice. This information may not apply to your situation particularly if you do not live in the state of California. Do not make legal decisions based on this material. Consult an attorney in person before making any important legal decision.