Understanding IRS Audits

First, a little history lesson. In 1998, the IRS Reform and Restructuring Act was passed, ordering the IRS to focus much more on taxpayer rights instead of collection activities. As a outcome, about one out each 79 tax returns had been audited that year. This dramatic reduce continued, and by 2003, according to IRS data, only one of each 150 person taxpayers had been audited.

I am afraid this good trend did not continue though. The IRS quickly returned to their wicked methods and by 2005, the number of audits hit it's highest because 1998. The 2006 tax year saw 1.28 million people audited.

One big purpose this happened is simply because taxpayers, mainly those that skew their numbers purposely, became too bold. Much more and more tax errors were becoming made and the IRS decided to step up collections again. So the same lawmakers who as soon as demanded the IRS give taxpayers the advantage of the doubt started applauding the new aggressive method. Members of Congress are hoping that enhanced enforcement efforts will help close the $345 billion tax gap. According to 2001 figures, that amount represents the distinction between what taxpayers should have paid and what they really paid. So, without some assist from extra IRS collections, Congress would have to consider raising taxes.

But do not let worry of a possible audit discourage you from filing for credits or taking legitimate deductions. Even though some actions taken on your tax return are most likely to raise a red flag, that doesn't necessarily mean you will be audited. Even if your return is questioned, it's not absolute that you will end up owing the IRS. As long as your deductions and expenses are legitimate and you have documentation, you will have nothing to be concerned about.

Types of Audits

But still, if you have found yourself in the cross-hairs of the IRS, it is essential to know what you are up against. Read below to learn about the different kinds of audits and what kind of trouble you're in.

Correspondence Audit: The correspondence audit is the simplest type of IRS audit. Throughout this audit, the IRS sends the taxpayer (via mail) a request for proof of a specific deduction or exemption taken by either completing a special type or sending photocopies of relevant financial records. On a positive note, the tax payer has the greatest chance of winning a correspondence audit.

IRS Office Audit: An IRS office audit is carried out in an IRS office and is mainly about simple tax matters.

Field Audit: Field audits are usually the most complete IRS audits and are performed by skilled IRS officers. I am afraid to say that a field audit usually results in additional tax bills for the tax payer.

IRS Repetitive Audit: An IRS repetitive audit is an IRS audit conducted on the exact same tax payer over and over. If no additional tax bills results from an audit and the IRS wants to audit the exact same tax payer again, the tax payer can ask the IRS to discontinue the IRS audit on the ground of IRS repetitive audit.

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