Because the IRS is unable to examine every return, it follows a policy of examining returns that, upon preliminary inspection, indicate the largest possible source of potential tax deficiency.
Returns are rated for audit according to a mathematical formula called the discriminant function system (DIF). In recent years, the IRS has audited fewer returns overall, but has increased audits of high-income taxpayers, Schedule C filers, S corporation and other business owners, and tax-shelter investors.
Taxpayers selected for audit are advised of their right to be represented by a certified public accountant, attorney, or enrolled agent. Once the taxpayer has chosen a representative, the IRS may not interview the taxpayer alone, unless consent is given. Together with the first letter of proposed tax deficiency, the IRS must give the taxpayer a clear and complete explanation of the administrative process from examination and appeals to the collection of taxes.
- How Returns Are Examined
- Audit Rules for Partnerships
- The Time Limits Within Which the IRS Must Act for Additional Taxes
- Filing Refund Claims
- How To Arrange Closing Agreements and Compromises
- How To Get the IRS' Opinion on a Tax Problem
- Circular 230: Practice Before the IRS
- Tax Return Preparer Penalties