IRS Auditing Process

Introduction

The words “IRS audit” strike fear in the hearts of many U.S. taxpayers. The process sounds intimidating, and sometimes is, but the IRS audits relatively few tax returns. According to some estimates, only about 2 percent of tax returns are the subject of IRS audits. In some cases, the audit does not involve examining an entire return, but only certain sections of it.

Selecting Returns for Examination

The IRS has several methods by which it selects tax returns for audit. One method is computer scoring. An IRS computer program examines tax returns, assigning numeric scores to each one. Two such scores are the Discriminant Function score and the Unreported Income score. The Discriminant Function score rates how much the return differs from similar returns, while the Unreported Income score rates the return’s potential for having unreported income. Once the computer scoring is complete, IRS employees examine the returns with the highest scores and select some for audit. On the returns selected for audit, the IRS will identify the items or parts of the return that require review. Other methods for selecting returns for audit include mismatches between income reported on the return and income reported on forms such as W-2s or Form 1099 statements. The IRS may audit returns that involve transactions with entities whose returns were selected for audit.

Audit Methods

A taxpayer whose return has been selected for audit receives a notification letter from the IRS. The letter should specify what information or records will be needed. Taxpayers may represent themselves in the matter or have a representative, such as their tax preparation professional, act on their behalf. The audit itself may not involve a face-to-face meeting with IRS officials. The IRS may conduct some examinations, such as those that merely require additional documentation or verification of items on the return, by mail. For audits that require an in-person meeting with IRS representatives, the meeting can take place at the taxpayer’s home or place of business or at an IRS field office.

Taxpayers' Rights

IRS employees are supposed to explain and protect the rights of taxpayers throughout the audit process. Taxpayers’ rights include the right to professional and courteous treatment by IRS personnel, the right to confidentiality in tax-related matters, the right to know why the IRS is requesting certain information and how it plans to use it and the right to representation during the audit process. In addition, taxpayers have the right to appeal IRS decisions to the agency and in court.

References

About the Author

Shane Hall is a writer and research analyst with more than 20 years of experience. His work has appeared in "Brookings Papers on Education Policy," "Population and Development" and various Texas newspapers. Hall has a Doctor of Philosophy in political economy and is a former college instructor of economics and political science.