The most burning question often asked of tax practitioners is a simple one – “What are my chances of being audited?” Despite the simplicity of the question, the answer is relatively complicated. An individual’s or business’ chance of being selected for an Internal Revenue Service (“IRS”) audit is based on a number of different factors, including IRS computer models, certain “red flags” that may target a return for examination, and the failure to report information that was reported to the IRS by a third party, such as on a Form 1099-INT filed by a bank. Recently, the IRS released its annual “data book,” a publication that provides statistical information regarding the IRS’s audit activities during the previous fiscal year. One key piece of information contained in the recent data book is the number and categories of tax returns examined by the IRS during 2009 – statistics that also help predict the IRS’s likely audit activities during 2010 and beyond.
As noted above, the IRS’s annual “data book” contains statistical information regarding the IRS’s audit
activities during the previous fiscal year. In this case, the 2009 data book compares tax returns filed in the 2008 calendar year, and audited during the 2009 fiscal year, to returns filed during the 2007 calendar year and audited during the 2008 fiscal year. Before delving into the 2009 data book statistics, however, some background information about the IRS audit function is helpful.
The IRS derives its audit authority from Section 7602 of the Internal Revenue Code (the “IRC”), which
grants the IRS broad authority to “examine any books, papers, records, or other data” relevant to determining the correctness of any federal tax return. In carrying out its examination function, the IRS conducts three main types of audits, namely correspondence audits, office audits, and field audits. The correspondence audit is the most straightforward and involves a letter from the IRS requesting additional information with respect to a particular item on a tax return and/or proposing an additional amount of taxes due.
The next level of audit is the office audit, where the IRS asks that certain information be presented during a meeting with an IRS revenue agent. The third and most complicated type of audit is a field audit. Field audits are conducted by the IRS at the taxpayer’s place of business and are the most comprehensive form of audit conducted by the IRS.
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