IRS Audits
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Receiving an IRS audit notice can feel like the ground has shifted beneath you. The thought of gathering years of documentation, facing IRS agents, and potentially owing thousands in additional taxes weighs heavily on business owners. But here’s what most people don’t realize: the outcome of an IRS audit isn’t determined solely by the facts of your case—the way you navigate the process matters just as much.
What is an IRS Audit?
An IRS audit is an examination of your tax return to verify that income, deductions, and credits are accurate. The IRS selects returns for audit through several methods, including their secret computer algorithm called the Discriminant Function System (DIF), random selection, and referrals from other audits or whistleblowers. The DIF system assigns a score to every tax return—while the exact formula is confidential, a higher score indicates a greater probability of tax change upon examination.
Types of IRS Audits
Correspondence Audits are conducted entirely by mail. The IRS sends a letter requesting documentation for specific items on your return. These are typically the least complex audits and often involve issues like missing forms or simple verification requests.
Office Audits require you to visit an IRS office with your records. An IRS tax examiner reviews your documentation in person and asks questions about specific line items on your return.
Field Audits are the most comprehensive. An IRS revenue agent visits your home or business to examine your books and records on-site. These audits are typically reserved for more complex returns or situations where the IRS needs to understand your business operations firsthand.
How Tax Disputes Affect Business Owners
Tax disputes affect business owners in two significant ways: physical bandwidth and mental bandwidth. Physically, it takes considerable time to gather documents from years ago, work with your team to locate records, meet with IRS agents, and understand complex tax law and IRS procedures. Mentally, having an audit hanging over your head creates stress and distraction—you already have a full-time job running your business, and dealing with a tax dispute adds on top of that.
What Increases Your Audit Risk?
IRS examiners are trained to look for ‘large, unusual, or questionable’ items on tax returns. These include disproportionate deductions compared to your income level, round numbers instead of precise figures, claiming 100% business use of a vehicle, multiple years of business losses, and items inconsistent with your business type. Understanding these triggers can help you prepare proper documentation before an audit occurs.
The Danger of Ignoring IRS Notices
Many taxpayers are tempted to stuff IRS notices in a drawer and pretend they don’t exist. This is a critical mistake. The government’s tax collection system is designed to move forward automatically unless someone interrupts its flow. Left to its natural progression, a simple misunderstanding can transform into a complex legal and financial nightmare. Initial notices become follow-up notices, then notices of deficiency, then assessment notices, then collection actions—each step making resolution more difficult and expensive.
If you have received an IRS audit notice or have questions about the audit process, contact Boss Tax Law today for a consultation.