There are several levels of “audit” within the IRS. When most taxpayers think of “audit” they are envisioning a full blown audit where there is a face to face meeting with the IRS, and they are combing through your entire return (or returns). There are other forms of “small audits” (as we call them in our office) that can be a lot more consequential than they may appear at first glance.
There is a statistical analysis that is done on each return, and anomalies that fall out of the statistical range for that item it will be pulled for that one item. It will then be reviewed, and based upon the outcome of that review the IRS will determine if they wish to seek an answer for that one item, or if the audit will ultimately encompass the entire return. There are different divisions within the IRS that look at different things. The IRS will reach out to taxpayers in an automated fashion if there is a small issue with the return, such as an error in calculation, or a source of income is reported by one source and omitted on the return. They may be looking for patterns of behavior over a period of years, or they may be looking for a reason to expand the investigation to a full blown audit.
One of the biggest issues, from a taxpayer’s perspective, are the “protections” that have been enacted by Congress over the years to protect taxpayers from the IRS. These small audits or touches by the IRS may not trigger the specific protections provided by law, leaving the taxpayer more vulnerable to the power of the IRS. One should always obviously exercise caution when contacted by the IRS. If the issue in question is a simple miscalculation you are probably ok. But if they are questioning something that could be construed as a pattern – documentation for business expenses, or classification of an employee as independent contractor – red flags should be raised and you should reach out to us immediately for a complimentary consultation at 866-631-3470 and speak with an experienced tax attorney today.
