Running Head: THE PROCESS AND PREVENTING THE RISK OF A TAX AUDIT 1
The Process and Preventing the Risk of a Tax Audit
National American University
August 12, 2012
THE PROCESS AND PREVENTING THE RISK OF A TAX AUDIT 2
This paper illustrates how an Internal Revenue Service (IRS) audit strikes fears in individuals,
small businesses and large corporations. By understanding the process of a tax audit and
reporting information that is understandable, people can lesson some of the risk. According to
Sidney Weisman, an attorney and senior ...view middle of the document...
64). The IRS is
prohibited from asking about the financial status, standard of living, and similar factors for
Individuals should not rule out reasonable large deductions. Individuals need to claim what is
entitled but making sure he or she has supporting documents that are kept in a safe place. If an
audit has been sent by the IRS, there are three items that an individual need to do:
1. Write down what areas on the return are being questioned for the audit notification.
2. Make copies of the document that support the case for an audit.
3. Decide whether an advisor (attorney) is needed to assist. (Mills, 1988, p. 1.52).
The audit processes consist of five segments. The first segment is the selection process. The
tax return is checked at one of the ten regional service centers for completeness and accuracy of
the numbers. Any changes made to the tax return in processing are based on the information
THE PROCESS AND PREVENTING THE RISK OF A TAX AUDIT 4
contained in the tax forms and schedules. Selection of most returns is done through a computer
program called Discriminant Function Systems (DFS). “The content of the DFS program is
highly classified and only a select few individuals have access to it” (Battles, 2006, p. 212).
Some returns are selected under the Taxpayer Compliance Measurement Program (TCMP).
The program is a random selection process to determine correct tax liability. Tax audits are also
selected through a variety of other systems. The system is called the Information Returns
Program (IRP) in which Forms W-2, 1099, etc. are matched with the tax return to determine if
all the income received has been reported on the tax return for the tax year.
The second segment is the examination of the tax return. The examination may be conducted
by correspondent, office interview, or field interview. The correspondence audit is the simplest
that is conducted by mail through one of the ten IRS service centers in the United States. Items
commonly audited by correspondence are interest expenses, medical expenses, and charitable
contributions. The office examination is an interview audit conducted by a tax auditor at a local
site of the IRS. The office interview audit usually last about one to two hours. Like the
correspondent audit, items commonly audited includes itemized deductions, business expenses,
rental income, expenses on Schedules C and F, tax credits, and all income items. The field
interview is usually conducted by revenue agents at the individual’s business or home.
“Usually the field interviews are for businesses, partnerships, corporations, and wealthy
taxpayers with the help of a certified public accountant or tax attorneys” (Rankin, 1981, p. 2.29).
The third segment is the notification process. “For...