The IRS audits tax returns basically for three purposes. To:
1. Collect money
2. Ensure compliance with the law
3. Fulfill its purpose as the administrative agency in charge of tax laws
To collect money the IRS uses statistics and computer programs to determine the tax returns that not only should be audited but the ones that will generate enough money as a result of the audit to justify the cost of the employee conducting the tax audit.
There may be another reason structured to deter people from relying on the fact that they are small fish and hence will not be audited. In this case the IRS will audit the tax return regardless of the economics of the process. In other words, the IRS will audit the return knowingly that it will lose money, just to scare people with less income.
The IRS audits individual and corporate tax returns. Usually corporate returns yield more money over individual returns. The more returns the IRS audits, the more money it makes. But because of budget constraints, the IRS seems to be auditing less returns than it used to.
Ensure Compliance with the Law
To ensure compliance with the law the IRS examines returns with the purpose that the income as reported should yield based on the law certain amount of tax liability. The purpose of the IRS audit in this case is to determine any deviation from application of the law and accordingly tax deficiency resulting from this deviation.
Fulfill its Purpose as the Administrative Agency in Charge of Tax Laws
To fulfill its purpose as an agency in charge of the administration of the law and collecting the tax that should be collected, the IRS uses the audit process and the administrative departments with its arsenal of computers and human resources to conduct the audits.
The IRS starts the process by selecting tax returns that meet certain criteria as identified by its computer programs. Each return is assigned certain scores, say based on the errors in the returns, susceptibly of certain items on the return or possibly certain items are in vogue to be audited on the returns. Those selected returns are then examined by IRS personnel to see if the computer model matches the actual issues on the return.
After selecting the returns for the tax audit, the audit process starts in earnest. The audit process can be either in the district areas offices or conducted from the service center in the capital of the state.
The audit may be as simple as a letter asking questions and requesting a document or two to verify specific items or it may be more expanded into an office audit or further expanded into a field audit. Field audits are the most serious. When they come and visit your office, know that you are in a field audit. Usually agents conducting the field audit are the most experienced. Also field audits are usually for auditing corporations.
After completing the tax audit the auditor submits the audit report for the supervisor to review. The taxpayer after that is sent a 30 day letter either to sign the report as agreed or proceed to audit appeal. If the taxpayer does not respond to the 30 day letter the audit result is final unless the taxpayer receives the 90 day letter and goes to court to challenge the tax audit results.