Tax Examination Procedures

Initiation of an Examination

A tax examination, or audit, may be triggered by various factors including discrepancies identified during computer processing of tax returns, information reported by third parties (e.g., banks, employers), or selection based on statistical sampling techniques. The examination process begins with a formal notification, usually a letter, specifying the tax year(s) under review and the type of examination (correspondence, office, or field).

Types of Examinations

• Correspondence Examination: Conducted through mail, requesting clarification or additional documentation on specific items on the tax return. Generally the least complex.
• Office Examination: Requires the taxpayer to meet with an auditor at an IRS office to provide information and documentation. Typically involves a more in-depth review of tax records.
• Field Examination: The most comprehensive type, conducted at the taxpayer's place of business or residence. Involves a thorough review of financial records, possibly extending beyond the tax year(s) under initial scrutiny.

Information Required During an Examination

Taxpayers are expected to provide complete and accurate documentation to support the information reported on their tax return. This may include bank statements, receipts, invoices, business records, and other relevant financial documents. Failure to provide requested information can result in penalties.

Auditor's Responsibilities

The auditor's role is to verify the accuracy and completeness of the tax return. They are responsible for conducting a thorough and impartial examination, following established guidelines and procedures. Auditors may request additional information, conduct interviews, and analyze financial records to determine the correct tax liability.

Resolution of the Examination

Following the examination, the auditor will issue a report summarizing their findings and any proposed adjustments to the tax return. The taxpayer has the opportunity to agree with or challenge these findings. If a disagreement arises, various dispute resolution mechanisms exist, including appeals to higher levels within the tax agency.

Penalties and Interest

If the examination reveals inaccuracies or omissions, the taxpayer may be assessed penalties and interest on any unpaid taxes. The amount of penalties and interest can vary depending on the nature and extent of the discrepancy and whether the inaccuracies are deemed intentional or due to negligence.

Representation

Taxpayers have the right to be represented by a tax professional (e.g., an enrolled agent, certified public accountant, or tax attorney) during the audit process. Representation can significantly aid in navigating complex tax regulations and protecting taxpayer rights.