Types of IRS In-House Tax Audits
There are three kinds. One is when you send a return in with documentation, not e-filed. That is required for amended returns, returns with large refunds such as adoption credits, and complex returns with real estate short sales, foreclosures, or credits. Because they already have the returns in hand the government people will review them and sometimes even send them off to another office which specializes in the type of transaction in question.
A document request can then fall out of the audit and the results will need to be proven by the taxpayer. Sometimes this results in a formal business audit. Remember that manual returns are reviewed by humans as well as the computer.
Another kind is when a clerk informs the client that their return is being audited by mail and to send in the information requested. These are tough audits. They will not change the venue to your favorite office audit location where you can meet them mano a mano. They are always difficult because they are not looking for explanations, just hard cold proof of deductions and expenses.
It needs to be understood that their computers are Very thorough at screening income and deduction data they receive from thousands of sources. The computers will fire off many computer-generated letters explaining what they found missing from your tax returns and you will have a chance to respond. This is the correspondence audit which is not really an audit but a notice of discrepancy.
One big one that always shows up is from broker firms because the stock trading purchases and sales must be matched. A big broker item resulted in a preliminary large assessment on a vice president of a huge firm who had taken a stock option bonus of mid-six figures. The bonus was shown as a stock sale but it was then run through payroll and a W-2 form.
The numbers didn't match until we showed the IRS that the huge amount was accounted for. Like the above audits, there is always a response period for the taxpayer, then an appeal to supervision [who already saw it before], and lastly a tax court appeal after receiving the final 90-day letter.
* Phillip B Chute is an Enrolled Agent, tested, licensed, and appointed by the IRS directly. He has prepared or supervised over 25,000 tax returns over 30 years.