RANDOM IRS TAX RETURN AUDITS TO BEGIN

Posted 10/09/07

Tax audit. Those two words can strike fear in the heart of almost any taxpayer.

Most taxpayers feel that, because they report every dollar of income they receive and claim only those losses, deductions and credits that can be substantiated, they are immune to an IRS examination of their returns. That may not be the case.

This fall, the IRS has begun a wave of random audits. The goal is to obtain information to update formulas the government uses in determining which income-tax returns to audit in the future.

Closing the Tax Gap

This random audit program is part of a campaign to close the “tax gap” — the difference between what the government collects in taxes each year and what it should be collecting. Estimates of the tax gap range as high as $290 billion a year.

Scope of the Audit

In the early 1990s, these data-gathering audits were seen as being overly intrusive. Reports of the IRS challenging nearly every item on a tax return were common and the IRS often required substantiation for almost every claim made (such as demanding to see a marriage certificate to verify a couple is eligible to file a joint return and requesting the birth certificates of those claimed as dependents).

In recent years, though, the IRS has taken a somewhat less-aggressive approach to the random audit program. And, while, according to the IRS, the new program “will probably cover more ground than a regular audit,” it likely will not be as intrusive as the random audits of the early 1990s.

What to Do If You Are Audited

So, what should you do if your return is one of the estimated 13,000 returns for the 2006 tax year that the IRS will be examining in this first round of random audits? It’s possible you won’t even be aware of the audit. The IRS may be able to verify all the information it is looking for by computer-matching what was claimed against what was reported by your employer, financial institutions, and others. In other cases, taxpayers will be able to comply with the IRS’s requests by mail.

However, it is likely that most of the returns selected for the random audits will require in-person meetings with IRS examiners. In those cases, the tax issues raised can be very complex, even if the taxpayer filed a “simple” tax return.

Should you receive a communication from the IRS regarding an examination of your return, we recommend that you contact us immediately. We can help you determine the scope of the audit and whether our professional assistance will be required.

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To ensure compliance with requirements imposed by the U.S. Department of the Treasury and the IRS, we inform you that any federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or (ii) promoting, marketing, or recommending to another person any transaction or matter addressed herein.