To Hell and Back: Different Types of Tax Audits

The very thought of an IRS audit is enough to make most business owners break into a cold sweat. But not all audits are created alike: There are several different types of tax audits, ranging from simple requests for a particular piece of information to comprehensive reviews that cover every aspect of a business. The type of audit you face can make an important difference in how to respond, what types of questions to expect and even whether or not you should retain legal counsel or other professional assistance.

Correspondence Audit

This is a relatively simple procedure in which the IRS asks you to document an item on your return by a specified date. This is usually a routine test for compliance with certain items on your return. You'll have to dig out your receipts or other documents, make a photocopy for the IRS and mail it in with a copy of the audit request.

Office Audit

The IRS may ask you to report to a nearby IRS office and document one or more items on your return. You may be able to send them copies of this proof in advance of the appointment and resolve the issue without actually going to the office. This is usually an easy process unless discrepancies or errors prompt the IRS to dig deeper into your return.

Field Audit

This is the audit most people dread. The IRS will ask you to provide documentation of various items on your return and to meet with an IRS agent for a thorough review of your records. You can request a postponement, so be sure to ask for one if you need it to gather the necessary documents.

You are allowed to decide when and where to schedule the meeting. Choose a neutral location -- preferably in your accountant's or attorney's office, since they probably know more about tax laws than you do, and they can provide the best possible assistance. A neutral site also prevents the IRS agent from prejudging your income level based on a first impression of your home or office -- an impression that is generally not to your advantage.

Before the meeting, gather the requested documents, organize them neatly and review your return to substantiate each item in question. Bring all requested documents, such as bank statements, canceled checks, receipts, business logs and the calculations you used to arrive at your figures, to the meeting. Presenting yourself as thorough and organized can help improve your credibility. Be prepared to answer the auditor's questions, but don't volunteer information. You can ask your attorney to speak on your behalf if you wish. Whatever you do, don't lie -- if you do, you could face criminal charges.

Taxpayer Compliance Measurement Program Audit

This rather lengthy and detailed audit asks you to document and prove every single item in your return. The IRS performs this audit in order to:

Determine compliance levels Estimate tax gaps (the difference between the amount of income tax owed and the amount paid) Develop formulas to decide what kinds of returns should be audited Allocate audit resources

The IRS and Congress use the data from these audits for research and statistical purposes. These audits are arbitrary, and anyone can face them regardless of how carefully they prepare their tax returns.

Criminal-Investigation Audit

If you are suspected of tax evasion, the IRS will conduct a criminal-investigation audit. If they prove that you have purposefully not paid your income taxes, you can face substantial fines and even jail time. Obviously, you should retain qualified legal counsel if you face this type of audit.

Get It Over With!

Unless your records are perfect, the IRS will probably disallow at least one deduction on your return or reclassify some deposit you cannot document (perhaps a gift) as income. Most people who get audited end up owing something. An audit isn't fun, but the best thing you can do is to cooperate with the IRS agent. With any luck, the agent will check out a few basic items and wrap things up quickly.

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