Understanding how an Internal Revenue Service (IRS) civil or criminal tax audit is conducted can help if you are contacted by them.
If you are selected for an audit by the IRS, you will be contacted by mail. The IRS does not reach out to taxpayers for an audit by phone or email. If you do receive a letter from the IRS, you may wonder why you were selected.
Since 2020, the number of audits conducted has dropped since the years leading up to the pandemic. Chronically under-funded and short on staff, the IRS audits only a small fraction of the individual income tax returns it receives each year. That said, the higher your income tax bracket, the more likely you are to face an audit.
You could also be audited due to your relationship with other taxpayers who are being audited. Or the score assigned to your return may push you into the audit pile. Most people do not know why they were selected for audit. If you have filed a false tax return or know that your return has a whiff or more of tax fraud, receiving an audit letter from the IRS can be quite sobering.
The IRS conducts two types of audits. You may be asked to participate in a correspondence audit, which is conducted through the mail. You may also be notified of a face-to-face audit, which can occur at your place of business or at a local IRS office. The complexity of your return and your adjusted gross income impact the decision for a correspondence or in-person audit. The type of audit also determines the type of examiner who will conduct your audit.
A correspondence audit allows you to mail relevant documents to the IRS for review. The IRS conducts audits more often by mail than in-person. For these audits, concerns cluster around employee business expenses, medical expenses, child tax credits, and the like. Examiners are trained but may not have education or experience in accounting.
In-person audits can involve an interview of the taxpayer, but not on-site inspection of the books. The IRS may have concerns about royalties, business deductions, annuities, pensions and more. Tax examiners who conduct audit interviews are trained and have some accounting experience as well.
In-person audits that occur at the place of business of the taxpayer are conducted by a Revenue Agent who is highly trained in complex business transactions and accounting. These audits involve extensive review of the books and could be triggered by high wealth, crypto transactions, executive compensation, and offshore tax investments.
An IRS civil tax audit can turn into an IRS criminal tax investigation if the IRS finds evidence indicative of tax crimes. If you receive an audit letter, make a call to a reputable tax attorney. Forewarned is forearmed.
Experienced legal guidance on IRS investigations, audits and compliance issues
Serving local and international clients from offices in Chicago and Cleveland, the legal team at Robert J. Fedor, Esq., LLC helps you respond strategically to questions about tax controversy, foreign bank accounts, or payroll tax issues. Call 800-579-0997 or contact us today.