IRS Audit Assistance

• Front Loaded Programs
  • Front Loaded programs are those tax audits that IRS DC headquarters has determined are particularly important and a considerable amount of focus and time is expended on these programs and activities. Each area has discussions within management as to what the programs should be for each region, district, and office.
  • Some of the programs are:
    • Special enforcement programs – An example of this may be compliance of all flee market vendors, a program I was involved with
    • High Income non-filers – The IRS would get their information from a match program of w-2’s and 1099’s and match up social security numbers against filed returns
    • Abusive Tax Avoidance – This could be in the area of offshore activities
    • Offshore credit card program
    • National Research programs – Those set forth by management after doing a trends project
    • FBAR filing – IRS is currently targeting those with overseas bank accounts
    • Non- filers –  IRS is presently forming a task force to seek non-filers though aggressive means.
• The IRS makes sure there is balanced coverage.
  • The National Office makes sure there is a balanced approach for audit return delivery and tax compliance. Resources and inventory and the size of personnel all go into this formula. The focus is blended into these areas:
    • Individual returns less than $100,000.
    • Individual returns greater than $100,000 but less than $200,000.
    • Individual returns greater than $ 200,000.
    • Small Business Corporations.
    • Small Business Flow-Through Entities – S Corporations, Fiduciaries and Partnerships.

• Classification Plan
  • The IRS will prepare a plan, which is classified. A National DIF score indicator is placed on all Federal Income tax returns that are filed. Each tax return has certain factors that contribute to its score such as Gross Income, Adjusted Gross Income and line item expense.
  • There are several classified secrets that go into the DIF score.
  • Each tax return is processed through the IRS computer line item by line item.
  • A DIF score label is placed on every tax return with its DIF number. A tax examiner or Revenue Agent manually eyeballs each and every tax return with a high DIF score. The examiner then determine which return has the highest probability of tax audit success.
• DIF Cutoff Score
  • The IRS will calculate the Area DIF cutoff score for each activity code, giving consideration to the selection rate. This is the lowest DIF score necessary to secure the number of returns required for audit. For example, if the return plan shows 225 returns for an activity code and the selection rate is 70%,  the IRS will need to order 321 returns (225/70%).
  • The DIF Cut off Score is 500. The number of returns with DIF scores greater than 550 is 280, which is less than the number of returns required, so the lowest DIF score on an ordered return will be in the range of 500 to 550 and the DIF cutoff score is 500. This is the IRS example as found in the IRS IRM section 4.
• Where your case is worked
  • Examination inventory is assigned to IRS offices based on ZIP codes, using the Look up Tables at Martinsburg Computing Center.
• High Assault Risk Areas
  • Certain ZIP code areas are identified as High Assault Risk Areas. There are special instructions the IRS has regarding these audits. These returns will be audited.

• While cases should be selected and started in accordance with all guidelines, in a limited number of circumstances, there may be returns that appear in the “judgment of the examiner and manager” to warrant survey without taxpayer contact. That is to not even contact the taxpayer.
• Cases delivered to the IRS area manager will generally fall into one of three categories: mandatory work, strategic (priority program) work, and non-strategic work.
  • Mandatory work includes nationally coordinated research projects such as NRP and employee audits (excludes “new” IRS employee audits)
  • Strategic work is identified annually in the Exam Program Letter which can be found at http://sbse.web.irs.gov/Exam/. The procedures to survey strategic work and referrals from other business units, “new” employee audits and cases with previous taxpayer contact require an explanation for the rationale for the survey.
  • Cases that are not mandatory work, strategic work, a referral from another business unit, and are not part of an employee examination or research study may be surveyed based upon the professional judgment of the examiner with concurrence of the immediate supervisor.
• Here are some factors to consider when determining whether to survey strategic work:
  1. Taxpayer is in bankruptcy
  2. Taxpayer has suffered an extreme hardship or illness
  3. Taxpayer is deceased, or
  4. Examiner has additional information that was not available during classification
  5. This is in the complete judgment of the IRS tax auditor

From year to year, the IRS changes their programs to keep everyone honest. However, after years of experience, a trained eye can see whether a tax return could be pulled for audit.

The IRS does not contact an individual via e-mail for an initial appointment. Contact related to being selected for an audit will be made via telephone or mail only, due to disclosure requirements.

Filing an amended return does not affect the selection process of the original return. However, amended returns also go through a screening process and the amended return may be selected for audit.

When returns are filed, they are compared against “norms” for similar returns. The “norms” are developed from audits of a statistically valid random sample of returns. These returns are selected as part of the National Research Program which the IRS conducts to update return selection information.

The return is next reviewed by an experienced auditor.  At this point, the return may be accepted as filed, or if based on the auditor’s experience questionable items are noted, the agent will identify the items noted and the return is forwarded for assignment to an examining group.

Upon assignment to a group, the return is reviewed by the manager.

Items considered in assigning a case are:  factors particular to the area such as issues pertaining to construction, farming, timber industry, etc. that have specific factors and rules that apply.  Based on the review, the manager can accept the return or assign the return to an auditor.

The assigned auditor again reviews the return for questionable items and either accepts it as filed or contacts the taxpayer to schedule an appointment.

It depends on the type of audit being conducted.

Some audits are conducted entirely by mail. If the audit is conducted by mail, you will receive a letter from the IRS asking for additional information about certain items shown on the tax return such as income, expenses, and itemized deductions.

In-Person Audits are audits conducted either at a local IRS office or at your business location.

If the audit has been scheduled to be conducted at your location, it will generally be conducted where the books and records are located.  Requests to transfer the audit to another location, including an IRS office, will be considered but may not be granted. Treasury Regulation 301.7605-1(e), Time and place of audit, discusses the items considered when a request for a change in location is made.

You can request a transfer of an audit if you have moved.  Several factors will be considered such as your current location, the location of the business and where the books and records are maintained.
If the audit is by correspondence, you can request a face-to-face audit because the books and records may be too voluminous to mail.

In the case of an asset, records related to the asset should generally be kept for as long as you have the asset plus three years.  If the asset was exchanged, the basis for the new asset may include the exchanged asset so the records for both assets will need to be retained until the new asset is disposed plus three years from the file date of the tax return for the year of disposition.

In general, payroll records should be kept for six years with a review of the file to see if any items relating to current employees should be retained with current records.

All cases may be reviewed by the auditor’s manager either during the audit or upon completion. If errors are noted by the manager, the auditor will contact you to advise you about the proposed correction and what impact this may have on the amount of tax due.

Generally, the IRS can include returns filed within the last three years in an audit.  Additional years can be added if a substantial error is identified.  Generally, if a substantial error is identified, the IRS will not go back more than the last six years.

The IRS tries to audit tax returns as soon as possible after they are filed.  Accordingly most audits will be of returns filed within the last two years.

If an audit is for an older year, you may be requested to extend the statute of limitations for assessment of your tax return.  The statute of limitations limits the time allowed to assess additional tax.

The statute of limitations is generally three years after the due date of the return or the date the return was filed, whichever is later.  There is also a statute of limitations for making a claim for refund.

If the audit is not resolved and the statute of limitations date is nearing, you may be asked to extend the statute of limitations date.  This will allow you additional time to provide further documentation to support your position, request an appeal if you do not agree with the audit results, or to claim a tax refund or credit. It also allows the IRS time to complete the audit and provides time to process the audit results.

You do not have to agree to extend the statute of limitations date.  However, if you do not agree, the examiner will be forced to make a determination based upon the information they currently have.  Therefore, the examiner may not be able to consider additional adjustments, such as expenses, that could lower the amount of tax due.