IRS Audits
| Author | Jeffrey Wilson |
| Pages | 1297-1303 |
Page 1297
The Internal Revenue Service (IRS) audit is an expansive subject. One needs to know a few of the basics of the U.S. history of the income tax to gain perspective on IRS audits. The history of income taxation in the United States is nearly as old as the United States itself. George Washington's administration levied the first taxes based on income. But there were three later major developments in the income tax law in the United States that made it a permanent fixture in U.S. political, economic, and legal culture.
The first major development occurred when Congress created the Office of the Commissioner of Revenue in 1862. The second major development came after the Civil War and various financial and economic crises of the late nineteenth century with the Sixteenth Amendment of the U.S. Constitution, ratified in 1913. This amendment states that "The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration." The income tax was permanently established shortly thereafter. The third major development came in the middle of World War II. In 1942, Congress enacted a law that required employees to withhold taxes owed by their employees from the employees' wages and salaries.
Besides mandated withholding, Congress provided the IRS with an extensive array of powers to persuade the American people to meet their tax obligations. Tax returns must be:
Accurate
Filed
Paid on time
The IRS has a variety of ways to choose which returns to audit, but only a relatively small number of individual taxpayers are actually selected for audits.
The prospect of an Internal Revenue Service (IRS) audit can create a good deal of anxiety in any taxpayer. An audit is a type of investigation used to determine whether the information provided to the government on the information/tax return is accurate. The audit is used in turn to determine whether the taxpayer paid the proper amount of tax. Audits are also used to uncover fraud. The taxpayer bears the burden of proof during an audit. That is, the taxpayer must prove to the IRS that the information the taxpayer reported on the income tax return is true and correct.
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Whether taxpayers need outside assistance such as an accountants or an attorneys when they are faced with an audit depends on their particular circumstances. If their tax matters are fairly simple, they may be able to handle the audit entirely on their own. But if the tax issues are complex or if they do not fully understand taxes, it is a good idea for them to hire a professional to assist them.
Some audits are fairly routine, and some result in only minor changes for the taxpayer. Some audits do result in additional taxes, penalties, or interest that the taxpayers must pay, but some audits do result in refunds. These results come from any of three basic types of audits:.
The mail audit: In these cases, the IRS will send a letter requesting an explanation or additional information. Note that an "Automatic Adjustment Notice," simply states that a taxpayer owes a certain amount of additional tax. These are usually the result of a calculating error.
The interview audit: Here, a taxpayer appears at an IRS office with all receipts and crucial documents ready for the audit.
The field audit: The IRS schedules field audits at the taxpayer's home or business. This is the usual form of audit for small businesses and for businesses operated from the home.
In some audit situations, a taxpayer may not need to actually meet in person with an IRS agent. These kinds of audits are conducted entirely by mail (sometimes known as "correspondence audits"). In an audit by mail, a taxpayer is commonly requested to justify or explain some part of a tax return by providing additional information through the mail.
If taxpayers are asked to provide documents to the IRS through the mail, they must send copies, as the IRS may misplace the originals. It is also a good idea to use certified mail, return receipt requested, to mail documents to the IRS. This method will provide proof that the response was mailed by the deadline the IRS gave the taxpayer. While phone calls can be more expeditious in some cases, that is not usually the case with the IRS. However, if taxpayers find it necessary to call the IRS about their audit, they should be sure to keep a detailed log of the call. They should record the date and time of the call, the name and title of any IRS employee with whom they speak, the general content of their discussion, and any advice or directions that they receive.
When taxpayers first hear from the IRS about an audit, they will receive a copy of the IRS publication, "Your Rights as a Taxpayer." This pamphlet contains an explanation of the Taxpayers' Bill of Rights, which has been enacted by Congress. It will also describes how the IRS conducts audits and collects unpaid taxes.
It is a very bad idea to ignore correspondence from the IRS about taxes. Doing so may expose taxpayers to negligence penalties; it may also lead to a full-blown audit that might otherwise have been unnecessary.
If the IRS determines that an audit should be conducted in person, it will either take place in an IRS office or in the taxpayer's home or business. The IRS conducts most field audits in offices, which are preferable often preferable to taxpayers. Even if the IRS asks to conduct the audit in the taxpayer's home or business, the taxpayer can keep the auditor away by providing all of the financial records to the tax adviser and asking that the audit be conducted at the tax advisor's place of business. If the IRS seems insistent that the audit takes place at the taxpayer's home or office, individuals need to keep in mind that they cannot be compelled to admit them to their home or place of business. In cases where this is an issue, taxpayers may need to show that an audit would be disruptive to their home or business to keep the auditor away from these places.
The IRS will allow taxpayers several weeks to prepare for an audit. Individuals need to use this time to gather the documents they will need to support the entries on their return. If taxpayers need extra time to prepare or to...
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