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.
Correspondence notices are used to correct the following types of obvious errors spotted at IRS Service Centers: medical expenses under the applicable ...