What can happen during IRS Tax Audit?

What can happen during IRS Tax Audit?

By Atty. Crispin Caday Lozano

As a taxpayer, you can refuse to be interviewed by the IRS if an authorized representative has been appointed unless the taxpayer has been issued an administrative summons.  If the taxpayer attends the interview unrepresented, the IRS must suspend the interview at any time, upon request by the taxpayer, to provide an opportunity for the taxpayer to seek representation.

The Taxpayer Bill of Rights expanded the IRS’s authority to abate interest arising from an unreasonable delay or error because of managerial acts.  Items covered by the expanded authority include delays arising from agent transfers, loss of records, illnesses, extended training or extended leave.  No abatement will occur for administrative decisions made by the IRS.

A taxpayer has the right to appeal any examination decision as well as the right not to pay any proposed increase in tax until the appeal is heard.

Audit of Individual Tax Returns

The audit of the individual tax returns (Form 1040) are generally conducted in one of two ways–by correspondence with the Service Center, or by appearing in person at an IRS Office before an Office Auditor.  In general, Office Auditors are interested in seeing documents on the issues listed in the examination letter.  It is prudent to bring only the documents necessary to resolve the issues listed in the examination letter and not bring documents relating to other issues.  This may prevent the Office Auditor from expanding the scope of the audit.  A correspondence audit is an examination conducted by one of the Service Centers.  It usually involves issues that can be resolved either by mail or over the telephone.  This type of audit are generally restricted to specific questions or issues involving easily verifiable information like form 1099 income or allowable itemized deductions.

The most common correspondence a taxpayer receives from the IRS is the computer generated Notice which indicate a discrepancy between the amounts reported by the taxpayer on the return and the amounts reported on an information return submitted to the IRS.  The information return program is designed to detect unreported income and excessive deductions by matching tax returns with information returns filed by payers of income such as dividend, interest income, and recipient of mortgage interest and IRA contributions.  The IRS also uses the information to identify persons who did not file a return.

After a determination that an error has occurred on a taxpayer’s return or that there is unreported income, a letter will be sent to the taxpayer, outlining the proposed changes and requesting the taxpayer’s agreement to the proposed adjustments.   In response to a correspondence examination, a taxpayer may:  agree with the proposed changes, request additional information or clarification of issues, explain the discrepancy, disagree with the adjustment, request a personal contact or disagree.

After the examination, there are three possible outcomes following the conclusion of the examination.

– The tax return is accepted as filed.

– The taxpayer and auditor agree on all issues, or some or all of the issues remain unresolved.

Note:   This is not a legal advice.

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