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Understanding IRS Audits

Travis Cole

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Some Background

First, a little history lesson. In 1998, the IRS Reform and Restructuring Act was passed, ordering the IRS to focus more on taxpayer rights instead of collection activities. As a result, about one out every 79 tax returns were audited that year. This dramatic decrease continued, and by 2003, according to IRS data, only one of every 150 individual taxpayers were audited.

I am afraid this positive trend did not continue though. The IRS soon returned to their wicked ways and by 2005, the number of audits hit it's highest since 1998. The 2006 tax year saw 1.28 million individuals audited.

One big reason this happened is because taxpayers, mainly those that skew their numbers purposely, became too bold. More and more tax errors were being made and the IRS decided to step up collections again. So the same lawmakers who once demanded the IRS give taxpayers the benefit of the doubt began applauding the new aggressive approach. Members of Congress are hoping that enhanced enforcement efforts will help close the $345 billion tax gap. According to 2001 figures, that amount represents the difference between what taxpayers should have paid and what they actually paid. So, without some help from additional IRS collections, Congress would have to consider raising taxes.

But don't let fear of a potential audit discourage you from filing for credits or taking legitimate deductions. Even though some actions taken on your tax return are likely to raise a red flag, that doesn't necessarily mean you'll be audited. Even if your return is questioned, it's not absolute that you'll end up owing the IRS. As long as your deductions and expenses are legitimate and you have documentation, you'll have nothing to worry about.

Types of Audits

But still, if you've found yourself in the cross-hairs of the IRS, it's important to know what you're up against. Read below to learn about the different kinds of audits and what kind of trouble you're in.

Correspondence Audit: The correspondence audit is the simplest type of IRS audit. During this audit, the IRS sends the taxpayer (via mail) a request for proof of a particular deduction or exemption taken by either completing a special form or sending photocopies of relevant financial records. On a positive note, the tax payer has the greatest chance of winning a correspondence audit.

IRS Office Audit: An IRS office audit is done in an IRS office and is mostly about simple tax matters.

Field Audit: Field audits are usually the most complete IRS audits and are performed by experienced IRS officers. I am afraid to say that a field audit usually results in additional tax bills for the tax payer.

IRS Repetitive Audit: An IRS repetitive audit is an IRS audit conducted on the same tax payer over and over. If no additional tax bills results from an audit and the IRS wants to audit the same tax payer again, the tax payer can ask the IRS to discontinue the IRS audit on the ground of IRS repetitive audit.

In general, representing yourself in an audit is a risky undertaking, especially if it's an IRS Office Audit or Field Audit. In these cases, it's best to seek representation from skilled tax professionals that know your rights and the limits of the IRS.

Travis B. Cole is a former Tax Consultant for Effectur Tax Resolution. However, he still stays current on tax matters and co-authors a blog, outlining new tax advice and tax policy each week.


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