IRS Audit: Correspondence Audit vs. Office Audit

IRS audits are the concern of everyone. People wonder why their tax returns are selected for an IRS audit. There are many reasons as to why the IRS selects a return for an audit. Briefly, the IRS has a scoring system for each return. They call it Discriminant Function (DIF). It is basically a computer program that is able to identify which returns have the potential to be audited. They score these returns, the higher the DIF the more the potential for a tax audit. No one precisely knows what the ingredients in this program or the formula are? It may contain relationship between the numbers on your tax return such as travel expenses to your gross income on schedule C. It may assign certain skewed weight to certain items on schedule C such as office at home and so on. 

Your chances of an IRS audit are usually higher as your reported income gets higher. Also, if your deductions do not conform to certain ratios for your size of income. Some items may be especially looked at such as employee business expenses, travel and meal, repairs and maintenance and office at home on schedule C. Amended returns may increase your chance of audit especially if you are requesting a large refund. Also errors mathematical or otherwise may cause the return to be audited.

What type of IRS audit will you be subjected to?

The IRS may send you a notice to send proof of items such as interest and tax on your home. You just send the evidence to them. Being Mr. Anxious you send the required documents quickly. You agree in the end with the IRS. You may pay a few dollars more. Case is closed. You have just gone through an IRS correspondence audit. It is an audit that the IRS thinks that it can usually be resolved through correspondence, no need for your presence. This type of audit is usually performed through the Service Center not the Area Office. It is usually used for an audit of individual returns and the amounts looked at are smaller.  Perhaps the IRS employee performing that audit is less experienced than the other types of audit.

The second type of IRS audits is Office Audit. In this type of audit you take your files and your shoe boxes and go to the nearest IRS Area Office. You present your case and you argue your evidence (we usually don’t even attend the IRS Office Audit.  We send our document to the IRS as if it is a correspondence audit.) As in correspondence audit you may have to present original documents such as cancelled checks and invoices. The items chosen for an office audit may require some explanation as to why an item by way of example was expensed instead of being capitalized or the calculation of an asset basis or whether income should be treated as capital gain or ordinary income. 

So the difference between these audits may be looked at through the nature of the items examined and the dollar amounts that may be subject to the audit. We will discuss Field Audit in later blogs. 

As always we welcome any comments or experiences anyone has had.