CONGRESS CREATED THE voluntary system for the collection of income taxes. In order to encourage the taxpaying public to continue to "volunteer" its income to the public treasury, the IRS, from time to time, finds it necessary to audit an individual’s or business’s income tax return.

The three types of audits that you most likely would be subject to include correspondence, office and field audits. Correspondence audits usually result from information appearing on your return that does not match the information received by the IRS from third parties.

Correspondence audits, as the name suggests, are commenced by an inquiry letter and take place almost entirely through the mail or over the telephone. All correspondence from the IRS will identify a contact person with a telephone number that taxpayers can call if they have any questions.

Office and field audits are more involved. The IRS usually begins an office audit by notifying the taxpayer by letter that it is examining the taxpayer’s return and schedules a time to meet with the taxpayer in person. The office examination typically takes place at the IRS office closest to the individual taxpayer’s home or place of business.

In an office audit, the IRS attempts to reconcile or support each item on the taxpayer’s return with supporting documentation, such as receipts and statements. The IRS also may want to determine if the level of income reported is correct. If the IRS suspects unreported income, they may question the taxpayer about other potential sources of income, the taxpayer’s lifestyle, asset purchases, cash on hand, payments on loans and the receipt of borrowed funds.

Field audits are, as a rule, conducted by more skilled revenue agents and involve business returns or more complicated individual returns. Field examinations are almost always conducted during normal business hours at the taxpayer’s place of business or where the original books and records are kept. The IRS will generally attempt to minimize the impact on the taxpayer’s business or daily life.

Where the audit is of a business, the IRS will often also review the income tax return of the significant owners of the business to ensure that returns are prepared on a consistent basis.

No matter what the type of audit, the taxpayer has certain rights and must be informed of those rights by the IRS agent at the outset of the audit.

The IRS provides each taxpayer undergoing an audit with the IRS publication, "Your Rights as a Taxpayer." Rights include representation during the audit by counsel, a certified public accountant, or other agent enrolled to practice before the IRS.

Given the complexity of the Internal Revenue Code and the potential consequences of an audit, having someone present at the audit who has knowledge of the law and IRS procedure should result in the best possible outcome and is a right the taxpayer should consider exercising.

The taxpayer can also request that any meeting with the IRS be recorded. The mere fact that they are being recorded may encourage IRS agents to meet the IRS’s goal of customer-oriented service. Additionally, the taxpayer has a right to know what aspect of the return the IRS is questioning. Finally, except in limited circumstances, the taxpayer has the right to expect that the IRS will conduct only one examination of the taxpayer’s return.

To avoid an audit, keep good records. First, learn how to prepare your own returns properly or find a qualified, organized and responsive certified public accountant or tax return preparer to do this for you.

Second, ensure that your business and personal income tax returns are consistent. Third, make sure your records match up with all your 1099 forms. All 1099s are sent to the IRS as well as to the taxpayer.

If you are audited, make sure you are represented by a tax professional who understands legal and IRS procedures. Where possible, the taxpayer should respond to the IRS’s inquiry promptly and provide whatever information the IRS has requested.

The taxpayer should send any response to the IRS by certified or registered mail and should retain the originals of any documents sent to the IRS. Make copies of all your tax information, including your returns and hold onto to those copies for seven years.

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