An Overview of the Different Types of IRS Audits

Back in the day, tax audits were random house visits by an IRS auditor who would go through boxes of your receipts to verify every number reported on your 1040 was accurate. Long since have those days passed.

Not only did someone realize this was very inefficient at finding fraudsters evading taxes, but the IRS got smarter. While the randomness still plays a hand in audit selection and there’s still roughly a 1% chance of being the lucky winner, there’s science behind it. There are essentially five different types of audits: correspondence, office, field, random, and criminal audits.

The types of audits and hows the IRS decides who to audit?

4 Types of Audits

  1. Correspondence Audits accounted for 76% of IRS audits in 2012. Often these are computer generated letters in response to common reporting mistakes, such as two returns claiming the same dependent, mathematical errors, and not matching third-party reporting documents, such as W-2s and 1099s. Most of these letters are sent out without a human ever reviewing the return – it’s an automated process. Correspondence audits are usually resolved by simply mailing back the supporting documentation requested. Many tax preparers, such as OTA Tax Pros, offer free assistance with responding to audit letters.

  2. Office Audits and Field Audits are essentially the same, the only difference being the location of the meeting. Because it’s cheaper and less intrusive, most tax auditors would much rather meet in an IRS office than go to your home and will accept pictures of any home office spaces in lieu of a tour of the private residence.

  3. It is recommended that taxpayers scheduled for these types of audits engage an Enrolled Agent, CPA or Tax Attorney to represent the taxpayer in these meetings. You don’t even have to show up. However, beware that audit representation, is almost always a separate service from tax preparation and can quickly run into the tens of thousands of dollars. In addition, most tax professionals don’t even offer these services.

  4. Random Audits still happen, however this type of audit is perhaps less random than people think. The IRS publishes what the average deductions are based on certain income tiers; and many tax professionals believe reporting “higher than average” deductions in certain areas can increase your “audit risk” or likeliness of being selected for “random” audit. By the numbers, taxpayers who gross more than $200,000 or are self-employed or have high itemized deductions may be 2-4 times as likely to be audited.

  5. Of all the types of audits, Criminal Audits are the most rare. This division of gun-toting special agents investigate, often undercover, cases of suspected criminal tax evasion. After more serious tax fraud than those taxpayers who over-report deductions, these IRS special agents often work off leads from whistleblowers to track down fraudulent tax preparers, unreported income, and work with other government agencies, such as the FBI when taking down Al Capone for tax evasion. Rest assured however, they would never call or threaten you over the phone – better to hang up on that scammer and ask your tax professional.

Know Your Tax Professional

As you can imagine, none of these types of audits are fun and a tax audit can be costly. For this reason, it is important that you be selective when choosing a tax preparer. Many tax professionals lack experience representing taxpayers and therefore aren’t as familiar with how the IRS may view certain items. It certainly would be an unpleasant discovery to find out the professional who prepared your return won’t defend your tax return.

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