The federal government uses a number of tools to ensure that individuals and entities are paying their tax obligations. One of those options is the audit. Internal Revenue Service (IRS) audits are used to evaluate income and earnings to determine whether a business or individual’s tax return is accurate.
In total, there are four different types of IRS audits. Some are more common than others, especially for individuals as opposed to businesses. If you are facing the prospect of an audit, reach out to a seasoned IRS audit attorney right away.
The most common type used by the IRS is the correspondence audit. It is also the simplest of the four options used by the federal government, as it generally involves a letter requesting additional information regarding a taxpayer’s return. Often, this means the IRS wants additional documentation to substantiate an expense or deduction.
There are different letters used as part of this process. The 566 letter is for requesting additional documentation, but there are other types of correspondence that can be a sign of more serious issues. For example, the CP2000 notice is sent when the government believes the information in a return does not match IRS records.
When the IRS agents’ questions about a return are too complex to resolve through back-and-forth correspondence, taxpayers may instead receive a letter asking them to appear at a government office for an audit. This process is more detailed than the correspondence approach, but it is not as intrusive as a field audit. The questions asked at the IRS office can be specific and narrow in scope, or they can include a wide range of issues within the company.
The most comprehensive approach the IRS can take is a field audit. This goes beyond mere correspondence as government agents will come to a business’s brick-and-mortar location to review the records in question. This task is carried out by revenue agents, who are more likely to have extensive experience combing through documents and records.
The scope of the investigation can be surprising to some business owners. While the matter in question might relate to a single transaction or contract, it is common for agents to ask for additional documentation once they arrive at the office. They will also use interviews to identify evidence of tax fraud or other issues. This is by far the most intrusive of the four possible audit options a company could face.
The fourth and final type of audit used by the IRS is known as the Taxpayer Compliance Measurement Program. Unlike most other options, this program is less about investigating the details of a tax return and more about updating Discriminate Function System (DIF) scores, which involves using computer programming to identify the likelihood of changes from one return to another based on past results.
This audit is comprehensive, with taxpayers providing checks, contracts, and any other documentation needed to establish each line on their return. Thankfully, this is the least common form of audit.
If you have been notified that the federal government intends to audit you, it is vital that you seek legal counsel right away. There are different types of IRS audits, and understanding each of them can help you navigate the process.
While having this information is important, the best way to protect your business is by working with seasoned legal counsel. Call for a confidential consultation to talk about your audit today.