The IRS and Audit Selection of Tax Return in San Jose, CA

The focus of my practice is assisting taxpayers with tax and financial issues that may be small, or could be large, or heading in the direction of becoming large. The area of audits and examinations is one that causes many taxpayers to cringe and begin worrying about facing an IRS agent or officer. This is just a normal and natural reaction to being put in a situation outside of their comfort zone since meeting with the IRS to explain a tax issue is not something that happens very often, if ever at all. But, we do provide IRS representation to those who rather not step into this arena.

Every tax return is audited by computer, then may be taken to the next step of being audited by a human before a decision is made as to whether further examination is deemed necessary. Here are the various reasons and methods the IRS use for determination of an audit/examination of a return:

• Statistical data or Discriminant Inventory Function (DIF) which is a computer scoring program written with IRS data. Every individual tax return will be audited by the DIF which will flag a return if it has a ranking score that is outside the statistical range limits. These returns are then reviewed by a person who will make a determination if the return should be selected for audit or not.
• Red flag deductions - Home office deduction has been considered a red flag deduction and taxpayers using the home for an office need to be sure that the office is being used for business purposes. Deductions for medical reasons, such as a swimming pool or hot tub for therapy, and deductions for what could be deemed as a hobby could raise a red flag.
• Third party information - these could be unhappy ex-spouses, upset business partners, friends, neighbors, or anyone else who may have had some sort of interaction or relationship with the taxpayer, but now has an issue.
• Related examinations - when tax returns involve issues or transactions with other taxpayers, such as business partners, family members, or friends, and these taxpayers have had returns examined, this could result in the IRS selecting your return for examination. Partnerships may find that all the partners are being selected for an examination. This would just be the logical deduction for the IRS to make.
• Information mismatching - payer reports information, like the employer W-2 and Interest Form 1099 from banks, or Schedules K-1 from partnerships or S Corporations do not match the tax return information.

The IRS then goes through a classification of the tax returns process of determining:

• whether the returns should be selected for examination
• what issues should be examined, and
• how the examination should be conducted

Once the IRS has determined that the tax return as is will not be accepted and an examination is needed, the decision is made on who will conduct the examination, that being:

• Revenue Agent which is a field exam where Agent will to come out to the taxpayer’s place of business and conduct the audit, reviewing the books and records, and interviewing the taxpayer.
• Tax Auditor which is an office audit where the IRS will send a letter with a date and time they would like to see the taxpayer with requested documents justifying their return at a local IRS office, or
• Tax Examiner which is done by automated correspondence where the tax payer calls the examiner and works through the examination without a face to face meeting. This is used for less complex issues allowing for more returns to be examined.

The main thing to remember, is prepare, prepare, and prepare some more. When the audit is received, get busy getting your all you data and documents together in an orderly, clear, and concise manner.

My next post will continue on with a closer look at the taxpayer rights for audits and examinations.

If you have any questions regarding audits and examinations or other IRS representation issues in San Jose, CA or elsewhere please feel free to contact me at (408) 627-8079 or email at dan.ohara@oharataxes.com

Dan Ohara

Ohara Tax Service

1569 Willowgate Dr.

San Jose, CA 95118