The Essence of an IRS Audit

April 4, 2019

By: Carl D. Barkow

 Have you ever been through an IRS Audit?  Well, you probably never will, but if you do get audited by a revenue agent or tax auditor, you will need to be prepared. Having all of your income and deductions clearly identified and having that paper trail will help you succeed.  In my 32 years as an IRS Agent, I have seen the best and worst of record keeping systems, from the paper bag to the computerized accounting and tax systems.

IRS auditing is a process of gathering of evidence to evaluate the accuracy of the tax return.  Some potential evidence includes the taxpayer's testimony, books and records, bank statements, and documents obtained from third parties.  To gather this evidence, the IRS will interview the taxpayers, tour the business sites, inspect residences, examine the taxpayer's records and reconcile bank statements.  Agents will pursue an examination until a reasonable determination of the correct tax liability can be made.

Once examiners reach their conclusions, the findings are communicated through formal, written letters called "30 Day" letters.  The examiner will then request the taxpayer's position on any unagreed issues, and seek payment of tax for any agreed issues.

The 30 Day Letter provides taxpayers with a copy of the examination report and advises them of their Appeal Rights when they do not agree with the examination report.   The taxpayer may respond with a request for an Appeals Hearing.  A case with a tax deficiency of more than $25,000 will require a formal written protest to all unagreed issues. Examination Group Managers, may at their discretion, discuss disputed issues with taxpayers in an attempt at resolving issues and obtaining agreements.  If this process fails, then the case will be forwarded to the IRS Office of Appeals for settlement negotiations.