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Why did the IRS audit me?

IRS computers in Martinsburg, West Virginia rate every tax return filed for possible errors using a mathematical formula known as the “DiF Score”, or the “Discriminate Function.”  The exact formula for the DiF Score is unknown, but it has to do with the amount of income you reported, sources of income, the size and types of deductions taken, marital status, and number of dependents.   The higher the computer rates your DiF score, the more likely you are to be audited.  In addition to returns selected for high DiF scores, IRS personnel also select returns for audit that present specific types of issues, such as amended returns and returns that do not contain all income reported for the taxpayer by third parties.

Types of Audits

Eggshell Audit  “Eggshell” is not an IRS term, but rather a term used by tax professionals to refer to a civil audit that could potentially be referred to the Criminal Investigation Division.  If you have been chosen for audit and you have reason to believe the auditor may uncover some substantial discrepancies in your tax returns, then yours could potentially be an “Eggshell” Audit, which should be handled very carefully in order to avoid a potential criminal referral.  It is better to owe taxes than be criminally prosecuted.

The Automated Underreporter Program  In this type of audit, the IRS computer matches the information you put on your return with the information reported to the IRS about you from third parties.  This includes items such as your W-2, 1099, mortgage interest, and gambling income.  If you understate your income or overstate your deductions, the IRS can use this information to detect your misstatements.  The IRS can also use this information to prepare a return for you if you fail to file.  This is called a Substitute for Return (“SFR”).

Correspondence Audit  This type of audit is conducted via letters from the IRS asking you to address a particular item on your return.  You will be asked to provide certain information and return to the IRS via the mail.  If you do not respond the IRS may make adjustments to your return causing you to owe additional tax.  An example of information the IRS might request in a correspondence audit is substantiation of medical expenses or child care.  The taxpayer would respond by providing copies of cancelled checks and invoices.

Office Audit  This audit takes place in person, but is scheduled by the IRS via a letter to the taxpayer indicating a time and place for the audit to take place.  The taxpayer is directed as to what items on the return will be examined, such as travel and entertainment expenses and charitable contributions, and what books and records to bring to the audit.  This interview takes place at an IRS office and may be attended by the taxpayer, his attorney, or both.   In some instances, your attorney may arrange for the audit to take place at the attorney’s office.

Field Audit  This type of audit involves business returns or complex individual returns and generally takes place at the taxpayer’s home or place of business.  Alternatively, if the records in question are delivered to your attorney’s office, the audit may take place at the attorney’s office.  The auditor will determine what items need to be examined to verify the accuracy of your return. The auditor may expand the scope of the audit at any time to include other items or other tax years if deemed necessary.  Popular audit items for small businesses include travel and entertainment.

Research Audit  In a research audit tax returns are chosen at random for purposes of training new agents and collecting statistical information.  Unfortunately, in this type of audit the auditor is required to examine every single item on the return.