Tax Audit Types: How Does an IRS Audit Work?

A tax audit, less commonly referred to as a taxpayer “examination,” is a formal process by which a state or federal tax authority – often the Internal Revenue Service (IRS), but sometimes the California; Franchise Tax Board (FTB), Employment Development Department (EDD) California Department of Tax and Fee Administration (CDTFA, formerly known as the BOE) which administers similar functions on California’s behalf – evaluates a taxpayer’s financial records in order to review their accuracy. However, despite sharing the same general purpose of evaluating taxpayer records, tax audits are not “one-size-fits-all.” On the contrary, there are actually numerous types of tax audits, ranging from worker classification audits (which examine whether employers have properly classified their workers as “employees” versus “independent contractors”) to FBAR audits (which can arise following a failure to report taxable foreign income or to provide required foreign information reporting). Regardless of what sort of tax issue gives rise to an audit, the examination itself will generally fall into one of three categories: it may be categorized as a “correspondence” audit, a “field” audit, or an “office” audit. Read on to learn more about the differences between these common types of IRS and California audits – and be sure to contact an experienced IRS tax audit lawyer if you have been chosen to undergo a tax examination.

3 Types of IRS Audits: Correspondence, Field, and Office

In this article, our IRS tax attorneys will be focusing on the similarities and differences between correspondence tax audits, field tax audits, and office tax audits. For information about other aspects of the audit process, readers may be interested in our related audit articles, which explore topics such as:

Otherwise, continue reading to learn more about some of the key traits that differentiate field, office, and correspondence audits from one another. For immediate assistance, we encourage you to contact our tax attorneys online, or by calling (800) 681-1295 for a reduced-rate consultation.

Audit Type #1: The Correspondence Audit

A correspondence audit is precisely what it sounds like: an audit that is carried out via mail “correspondence,” hence the name, with an IRS auditor. As is true of other types of audits, a correspondence audit is generally initiated because the IRS or State of California needs to verify information that a taxpayer has supplied on his or her tax return. As the IRS notes, “A correspondence audit is relatively limited in scope. An agent typically conducts the audit using letters and phone calls to work with the officers or a representative of the organization” where an entity is being audit or with a taxpayer directly.

Depending on how well the taxpayer has preserved his or her financial records, it may be possible to resolve a correspondence audit simply by providing the requested documents, such as receipts, statements, or invoices, to the IRS through the mail. However, if the taxpayer is missing the requested documentation, it is prudent to hire an experienced tax attorney, who can negotiate on the taxpayer’s behalf in the event that the IRS assesses penalties, interest, and/or fines.

Unfortunately, correspondence audit are largely automated and most stem from the IRS attempting to match taxable sources of income reported to them by third parties on 1099’s and W2’s, for example, against your tax return.   Large service centers handle taxpayer’s responses and often time you will not be dealing with the same person twice if a second or even third correspondence is necessary to settle the issue.   I have often suspected the IRS of outright ignoring correspondence on small dollar amounts issues thinking that most people will not spend the funds necessary to appeal the CP2000 type automatic determination of tax due.   They typically will eventually issue a 90-day letter if the issue cannot be settled as agreed forcing the taxpayer to file a tax court petition to keep the assessment from becoming legally collectible even where patented erroneous.   Our office has had great success in filing tax court petitions in these scenarios and then settling the issue with appeals or with chief counsel’s office prior to incurring expensive litigation costs.

Correspondence audits are often described as the “least serious” type of audit. However, that does not mean taxpayers should ignore letters from the IRS, which will merely lead to additional notices (while increasing the risk of financial penalties). If you are unsure of how best to proceed after being notified of a correspondence audit, you should consult with a tax attorney as soon as possible.  It is also possible for correspondence audits to lead to egg shell audit type scenarios in which case a criminal defense tax attorney may be necessary to deal with it.

Audit Type #2: The Office Audit

An office audit is much more serious than a correspondence audit, making swift response from the taxpayer essential. As the name suggests, the IRS will ask the taxpayer to physically appear at an IRS office (of which there are dozens in California). Though not mandatory by law, it is strongly recommended that the taxpayer bring his or her personal representative, such as an attorney or tax accountant, to the office audit. Not only will a skilled representative be able to prepare the taxpayer before the audit – he or she will also be ready to interject on the taxpayer’s behalf if the auditor’s questions or statements are unclear, inaccurate, or in any way infringe upon the taxpayer’s legal rights.

Though more elaborate (and generally greater cause for concern) than a correspondence audit, an office audit will often conclude in a single day or session in the simpler tax filing scenarios. Additional time will be granted should the IRS ask the taxpayer to produce supplementary documentation. The taxpayer should arrive for the audit with all financial documents that might impact or be needed during the examination, such as receipts, bank statements, deeds and/or leases, personal income tax returns and/or business income tax returns, retirement plan documents, and divorce decrees (in cases involving divorce tax issues, such as tax evasion and divorce).

Audit Type #3: The Field Audit

At the opposite end of the spectrum from correspondence audits lie field audits, which are sometimes described as the “worst” or “most serious” audits, giving field examinations a fearsome reputation among taxpayers. The IRS will not ordinarily conduct a field audit unless serious civil or event potential criminal tax noncompliance is suspected.

In an office audit, the taxpayer must go to the IRS. In a field audit, however, the IRS comes directly to the taxpayer: specifically, to the taxpayer’s home or place of business, depending on the nature of the examination.

While the prospect of undergoing a field audit can be daunting, it is imperative that the taxpayer face the audit in a timely fashion with all requested documents. As with most audits, it is strongly recommended that the taxpayer be represented by a Tax Attorney, a Certified Public Accountant (CPA), or ideally, a dual licensed Attorney-CPA.

IRS and FTB Tax Audit Attorneys Providing Appeals Representation

Every type of audit should be taken seriously, no matter how minor or insignificant the underlying issue initially appears to be as your net worth and potentially your liberty is at stake. As the IRS points out (italics our emphasis), “A correspondence audit can expand and become an in-person (field) audit, particularly if the issues grow more complex or the organization does not respond.” In other words, what is initially the least serious type of audit can develop into the most serious type of audit without appropriate action from the taxpayer. Therefore, if you have been contacted by the IRS regarding any type of audit, it is critical to be proactive and respond in a timely manner.

The foreign account tax audit lawyers at the Tax Law Office of David W. Klasing have represented thousands of taxpayers in a wide spectrum of business and individual audit procedures, ranging from real estate audits and dentist tax audits to California sales tax audits and employment tax audits. Further, we are prepared to provide aggressive FTB or IRS appeals representation and where necessary, litigation representation, should you wish to dispute the results of the audit. For a reduced-rate tax consultation about how our IRS or FTB tax audit lawyers can be of assistance to you, your spouse, or your business when preparing for or undergoing auditing, contact our tax law firm online, or call the Tax Law Office of David W. Klasing at (800) 681-1295 today.

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