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IRS Audits: The Types of Audits - Part Two

Continued from IRS Audits: The Types of Audits - Part One

Office Audits (continued)

After the AO examiner receives and evaluates the taxpayer’s information, the examiner will issue a decision based upon the type of case. For example, the AO examiner may “issue the audit reconsideration full allowance (full abatement of assessment)” by completing and submitting Letter 2738 DO, which is a service letter the IRS uses when the taxpayer’s case is eligible for full abatement. The examiner may issue an audit reconsideration full disallowance letter, which means the taxpayer would not receive an abatement of tax. Lastly, the examiner may issue another letter, an audit reconsideration partial disallowance letter (Letter 2737 DO, Examination Report). With this letter, the examiner must send to the taxpayers two publications: Publication 3598, What You Should Know About the Audit Reconsideration Process and Publication 5, Your Appeal Rights and How to Prepare a Protest If You Don’t Agree. Taxpayers may request an appeal for full disallowance and partial disallowance determinations.

Area Office examiners have little discretion and are typically required to verify income and deductions. “A taxpayer’s inability to produce adequate records may lead not only to disallowance of the disputed items for the year at issue, but also to audits of other years’ returns”.[1] It is important for taxpayers to maintain good records.

Field Audits

Field examinations, or field audits, are used for the most complex issues. The method of the audit is governed by the difficulty of the issues. Field audits are defined as in-person audits conducted at the organization’s location, the organization’s representative office, and/or at the local IRS office.[2] There are two types of field audits: general program and Team Examination Program. The first is defined as a type of field exam conducted by a revenue agent at the organization’s location. The second is defined as a type of exam involving a team of examiners; it is more specific to large, complex organizations.

Within this context, the examining agent will function as a revenue agent,[3] who may be an accountant who works for the Internal Revenue Service. Unlike other types of examinations, revenue agents spend considerable time reviewing the taxpayer’s return. The revenue agent examines and audits financial records of individuals, businesses, and corporations to ensure tax liabilities are met. The revenue agent reviews the taxpayer’s books and records at the place of business or warehousing location. In addition, the revenue agent reviews the taxpayer’s return and related supporting documentation. The agent may be assisted by an engineer agent, who supports the mission of the IRS by providing “professional and accurate development of issues and efficient and effective resolutions to more significant and complex engineering and valuation issues. Engineers provide expertise to issues encountered in all types of tax returns”.[4] The engineer agent plays a key role in supporting all IRS organizations that provide for the examination of taxpayer returns.

The type of IRS audit tends to reveal much about the purpose of each type of audit and the overall strategy of the Internal Revenue Service. By learning more about the motivations behind an IRS audit, taxpayers can hopefully avoid facing the scrutiny of the IRS. If you would like to know more about IRS audits, please read my other writings, available at: http://www.sambrotman.com/category/irs-audits-and-examination/

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[1] See: http://www.mbbp.com/resources/tax/irs_tax_audit.html

[2] See: www.irs.gov, “Charity and Nonprofit Audits: In Person [Field] Examination Audit,” 9/9/2013).

[3] Within this context, not all revenue agents are considered accountants.

[4] See: www.IRS.gov, “Part 4. Examining Process, Chapter 48. Engineering Program, Section 1. Overview of Engineering Program,” 9/9/2013).

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