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Why Am I being Audited?
Audits are an IRS investigatory tool used to determine whether the information provided on your tax return was correct and correspondingly whether or not the proper amount of tax was paid. Because the IRS only has limited resources to investigate taxpayer returns, all returns are processed through the IRS computers and assigned a discriminant function score. Your “DIF score” ranks returns by their likelihood to generate more tax revenue for the government. An examination agent then screens the return and will then make a recommendation for audit. Although the exact computation method is a closely guarded secret, your DIF score examines the relationship between your reported income amounts and deductions. The system, developed by compiled statistics of past taxpayer filing, is designed to ensure compliance and catch tax cheaters. The IRS has up to 3 years to audit a return from the date of filing. One notable exception is that if fraud has been committed then a return can be subject to audit at any time if a tax return has not in filed, or six years from the date of the filing if the IRS has one on file.
In the case of individual taxpayers, the IRS is most likely auditing your Schedule A (Itemized Deductions), Schedule C (Sole Proprietorship), Schedule E (Rents and Royalties), or income levels reported on your return. Small businesses and those that deal frequently with cash are also frequent audit targets.
Although some audits can be dealt with quickly and without legal representation, it is best to discuss the nuances of your situation with a qualified tax attorney. After consultation, the attorney can make an accurate determination if legal representation is needed. Conversations concerning audit strategy and your return are protected under the attorney-client privilege. This privilege only extends to conversations with an attorney, as discussions with a CPA or enrolled agent are not protected (the IRS can later subpoena these individuals to testify against you later).
Depending on the type of audit as well as the information being requested by the IRS, we can help you formulate a game plan to minimize your potential exposure and to limit the scope of the audit. Roughly less than 20% of audits obtain a “no-change” determination and the IRS can potentially open multiple years for review.
Please contact our office for further audit assistance or to schedule a free consultation.
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