The IRS Tax Audits and Examinations

A computer first checks every tax return, but the majority of people have no idea. After that, a person may review them. The purpose of this review is to determine if the IRS should conduct an examination. Here is some background on how the IRS determines whether to audit or not.

  • Statistical data or Discriminant Inventory Function (DIF) is a computer scoring program written with IRS data. The DIF audits all personal tax returns and flags any returns with a ranking score outside the statistical range limits. A person evaluates these returns and decides whether to audit them or not.
  • Red flag deductions are alerts that catch the IRS’s attention, and the home office deduction is one of them. Taxpayers who claim a home office must solely use it for business purposes, unless they use it for daycare. Claiming deductions for medical expenses like a pool or hot tub for therapy, or for hobbies, might draw attention.
  • Third party information is shared by individuals having some form of interaction or relationship with the taxpayer. This can include former spouses, disgruntled business partners, friends, neighbors, or anyone else who now has an issue with the taxpayer.
  • Related exams occur when your tax filings include transactions with other taxpayers. These taxpayers can include your business partners, family members, or acquaintances who have undergone an audit. That may result in the IRS choosing your return for further scrutiny.
  • Information mismatching is not uncommon and easy to spot. The payer’s information, like W-2 forms from employers or 1099 forms from banks, does not match the filed tax return.

The IRS then classifies the tax returns to determine:

  • Should we select the returns for examination?
  • What issues should we examine?
  • How should we conduct the examination?

The IRS determines if they cannot accept a tax return and requires an audit. They then choose the type of audit to conduct.

  • Field Audit – involves the agent visiting the taxpayer’s home, business location, or office of taxpayer’s representative to carry out a face to face examination. This process includes reviewing the financial books and records, as well as interviewing the taxpayer.
  • Office Audit – happens at an IRS office, usually with just the representative and required documents to answer questions. If the examiner agrees, we can send documents to the office and they will contact us if they need more information.
  • Mail Audit – a simple examination done by mail or fax, requesting basic information like income, expenses, and itemized deductions.

The IRS will send a letter with important details about the audit. These details include who to contact, when and where to meet, and when to send the requested information.

What to Do if Selected for an Audit

When you receive a letter stating that the tax return is under audit, most people feel scared and worried. We can help you with the audit and reduce your stress at Ohara & Associates LLC. You don’t necessarily need a tax audit lawyer or attorney to successfully work through the audit.

Dan Ohara, an enrolled agent and Certified Tax Resolution Specialist, can handle your audit case with expertise. He deals with the IRS and state taxing agencies regularly. After hiring us, you can share all your knowledge and give us all the documents that support your tax return.

We will closely cooperate with the examiner and review all the details of the IRS’s claims. Then, we will do our best to challenge and disprove the IRS’s suggested changes. Clear and concise tax documents help with exams. Even with imperfect records, we can still provide enough evidence to succeed.

During an examination, we can defend the filed documents. We can also submit extra documents that can potentially lower taxes or get a tax refund. And we can do all this without filing an amended return.

If you don’t agree with the proposed changes of the IRS, then you have a right to appeal their decision. Once we receive the letter of proposed changes from the IRS, we must file for an appeal within 30 days.

The case will go to the Appeals Office, and they will contact us when they assign an officer to your case. Then, we will collaborate with the Appeals (Settlement) Officer. I will cover appeals in more detail in a future blog.

It is imperative to understand the importance of, prepare, prepare, and prepare some more. When you get the audit, make sure to gather all your data and documents carefully and thoroughly. Organize them in a clear manner.

If you have questions about IRS audits in San Jose, CA, contact Dan Ohara at (408) 684-8505 or email dan@oharataxresolution.com.