When the IRS selects a taxpayer’s return for audit and it is beyond the scope of a correspondence audit it will be sent to the IRS office nearest the taxpayer for examination.
An office audit may include an examination of Schedule C (business operated by sole proprietor), Schedule E (rental property), and Schedule F (farming) as well issues relating to itemized deductions.
An auditor conducting an office audit is provided with an IRS Service Center classification sheet detailing the items to be examined. The auditor may limit the examination to these items or may expand the audit to other items or other open years. The auditor will review the tax return for any large, unusual or questionable deductions. If the auditor discovers such deductions, the audit will normally be expanded to include those items.
The auditor will begin the audit by asking numerous questions which are meant to determine whether the taxpayer has any unreported income. The auditor will then ask for documentation for the deductions listed on the classification sheet. The purpose of requesting documentation is two-fold. First, to determine whether the taxpayer actually incurred the expense claimed on the return and secondly, whether it was related to the taxpayer’s business.
If a Schedule C is the focus of the audit the auditor may examine such items as: auto expenses, legal and professional fees, commissions, and home office expenses. Medical expense deductions, charitable contributions and employee business expenses are itemized deductions that are often subject to office audits.
Acceptable forms of documentation may include travel logs, canceled checks, receipts and invoices. If you are unable to provide adequate documentation during the audit you may request additional time to gather the necessary information. The auditor will generally grant you a reasonable amount of time to provide the documentation.
There are several possible outcomes to an IRS office audit:
(1) The tax return can be accepted as filed and thus no adjustments are made.
(2) The auditor makes adjustments that are agreed to by the taxpayer, which results in an increase in tax.
(3) The taxpayer partially or completely disagrees with the auditor’s adjustments.
If the audit results in unagreed adjustments, you can first request to speak with the auditor’s manager in an attempt to resolve the issue. If the manager does not resolve the matter to your satisfaction, you have the right to an Appeals hearing. The hearing is conducted by an impartial Appeals officer within the IRS Appeals Office. If you have a reasonable basis for your position the Appeals Officer will often decide the issue in your favor.
If you are dissatisfied with the Appeals Officer’s decision you may file a petition to have your case heard in the U.S. Tax Court. Although you may represent yourself before the Court, it is strongly recommended that you retain a qualified tax attorney to argue your case.
The CPAs at East Coast Tax Consulting Group have been successfully representing taxpayers in office audits for more than 30 years. Our knowledge of the tax laws and experience in dealing with tax auditors and Appeals Officers have made us a leader in tax representation. For a free consultation call us today at 866-550-7655.