Types of Audits
Once a return is selected for audit, the Service then determines what type of audit to conduct. The audit can be either an office audit or a field audit. The Service also determines what type of auditor to assign to the audit.
An office audit for an individual return is conducted by a tax auditor. Office audits can be either correspondence audits or interview examinations. Individual returns selected for field audits are assigned to revenue agents. Corporate, partnership and fiduciary returns are also normally assigned to revenue agents. Additionally, even after a return is selected for exam, the Group Manager can close the case without an exam if he/she determines that the case has little audit potential.
Audits are either conducted by the service center or the district. Service center audits are correspondence audits; those that can be handled totally by mail. Service center audits include, but are not limited to unallowable items, multiple filers, matching information returns, alimony compliance, claims for refunds, married taxpayers filing separately, and substitute for returns.
District audits can be correspondence audits, office audits, or field audits. The type of audit to be conducted is based on the complexity of the issues and an analysis of which audit type will be most efficient and effective. For the most part, correspondence audits are handled by the service center. However, the district can conduct a correspondence audit on an individual tax return, if the issues are simple and verifiable by mail.
Office Audits
Office audits are primarily conducted for nonbusiness individual returns. These audits occur when the issues are too complex for a correspondence audit, but not complex enough to warrant a field audit. An office audit is initiated by a letter to the taxpayer informing him or her that a return has been selected for audit. This letter will also inform the taxpayer of the time and place of the audit, the issues to be addressed, and the documents that should be provided to the IRS by the taxpayer.
Office audits are usually limited to the issues identified in the initial contact letter. However, if additional issues arise as a result of information obtained at the audit, the auditor may expand the scope of the audit.
Generally, office audits are held in an IRS office of the district in which the taxpayer resides. In most cases, this is the IRS office closest to the taxpayer’s residence. The audit will be scheduled during normal workdays and business hours for the IRS. If a practitioner is unable to attend an audit scheduled for a particular time and place, the practitioner should contact the auditor to reschedule the audit. Generally, the examiner will work with the practitioner or the taxpayer to arrange a mutually convenient meeting time.
Lastly, if the practitioner determines that an office audit is not necessary and a correspondence audit will suffice, the practitioner can request that the audit be conducted by correspondence. The IRS will generally honor such requests as long as the issues involved are suitable for a correspondence audit. In contrast, however, requests to convert an office audit to a field audit are only honored when the taxpayer’s records are too voluminous to require transportation to an IRS office.
See IRC §7605 and Regs. §301.7605-1.
Field Audits
Field audits are conducted for almost all corporate, partnership and fiduciary returns as well as all complicated individual returns. The audit is usually initiated by a letter or telephone call to the taxpayer. The time and place of the audit are set by the IRS. However, as with office audits, the examiner will usually work with the practitioner or taxpayer to arrange a mutually satisfactory time and place. Generally, postponement of an audit for more than 60 days requires approval by a Group Manager.
The scope of the field exam is usually set by the revenue agent. For non-DIF returns, significant items are identified by the classifier. However, the revenue agent is free to expand or contract the issues to be examined. For DIF returns, classification does not identify significant items thus, the revenue officer determines the items to be examined.
General items will almost always be considered by any revenue agent. They include gross receipts, standard of living, and sources of income. The IRS normally follows what is referred to as the package audit concept which includes a review of copies of other returns filed by the taxpayer, either earlier or later in time, or related to the taxpayer’s business. See IRM 4261.4 (6-29-92).
The IRS also conducts special types of audits. They are as follows:
- Related returns: An adjustment on one return requires an adjustment or change on another. Example, husband and wife who file married filing separately.
- Whipsaw case: A transaction occurred between two parties and differing characterizations results in a benefit to one and an injury to another. Example, alimony vs. child support.
- Affiliated corporations.
- Compliance checks: Has the taxpayer filed all other required returns?
- TCMP: The Taxpayer Compliance Measurement Program is the Service’s long-range program for determining levels of compliance. It is primarily a research program and returns are selected randomly. Courts have held that such audits are proper even though they exist primarily for research purposes. See U.S. v. First National Bank of Dallas, 635 F.2d 391 (3rd. Cir. 1981). Presently, the Service has suspended this type of audit due to budget constraints.
- Delinquent returns.
- Estate and gift tax audits.
- Employment tax audits: FICA, FUTA, SECA, worker classification, and compensation issues.
- Employee plan and exempt organizations.
All examiners are required to follow certain standards when examining a return. See IRM 4015.5 (5-13-93), and IRM Exhibit 4010-1 (5-13-93). Practitioners should remember that except for TCMP audits, examiners or agents should not audit every item on a return. Instead, only significant items should be examined and it is the practitioner’s job to narrow the focus of the audit to those items that both the IRS and the taxpayer deem significant.
Examiners are required to determine the correct amount of tax due pursuant to the Internal Revenue laws as interpreted by the courts or the IRS. Thus, although examiners cannot settle cases based on the hazard of litigation, they can make determinations about legal and factual issues in conformity with the laws as interpreted by the courts and the IRS. Therefore, practitioners should present the facts and applicable laws in a manner that allows the examiner to find in favor of the taxpayer. Arguing that an IRS position is wrong will not result in a matter being resolved at exam.
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