Audit Representation

An audit is the process by which the Internal Revenue Service or other taxing authority determines whether the Taxpayer has properly reported all of his or her information, including income, deductions, exemptions and credits. If it is determined that the Taxpayer was in error, an assessment of additional taxes, interest, and sometime penalties will be made. To determine if the Taxpayer is in compliance, the Internal Revenue Service and other tax agencies have broad powers to examine the Taxpayer’s financial papers and records. Accordingly, it is imperative that the Taxpayer be prepared, organized and thorough in his or her response.

The Internal Revenue Service utilizes several examination techniques to determine the accuracy of the tax returns. Computers are utilized to verify the computations shown on each return. If it is determined that the computations are incorrect on a return, a notice is issued to the Taxpayer adjusting the amount of taxes on the return. Correspondence audits are initiated by the issuance of letters to the Taxpayer requiring verification of deductions and/or exemptions shown on a return. Office audits are conducted in local Internal Revenue Service offices. Field examinations are conducted by Revenue Agents of more complex returns.

When a return has been selected for a correspondence audit, the Internal Revenue Service has developed a series of computer generated notices with respect to various issues on a tax return. Once a reviewer has determined an issue for examination, he or she will cause the computer to generate the appropriate notice for that issue. The notice will grant the Taxpayer time to respond to the notice in writing. Some examples of the kinds of items which can be verified by a Correspondence Audit are itemized deductions, such as interest, taxes, charitable contributions, medical expenses, and simple miscellaneous deductions. Issues other than itemized deductions may be examined if they are a single matter which would not be appropriate for an office audit or field examination.

The Office Audit commences with a notice to the Taxpayer requesting his or her appearance at an Internal Revenue Service office on a certain date. The letter will typically list a series of documents which the Taxpayer must bring to the audit. When the letter arrives for an office audit, the Taxpayer may request that a proposed audit date be changed to a more convenient date. The most frequently examined items in an Office Audit include casualty and theft loss, charitable contributions, employee business expense, interest expense, medical expense, miscellaneous expenses, moving expense and rental income and expense.

Field Audits are normally initiated by a telephone call or a letter from a Revenue Agent. Unannounced visits from Revenue Agents are rare. Revenue Agents typically have a degree in accounting or equivalent accounting hours, and are responsible for auditing high income nonbusiness and business personal income tax returns. Revenue Agents also conduct almost all audits of corporate tax returns. Normally, the time and place of examination shall be such as may be determined by the Revenue Agent. There may be circumstances under which a taxpayer may request a transfer of the place of examination from one place to another, including the office of the Taxpayer’s tax attorney.