A tax audit is the process by which the IRS or state tax authority investigates the validity of an individual or business tax return. In a traditional or examination audit, the investigation involves meetings in person between officials and the taxpayer. In a Correspondence Audit, the entire process is conducted on via mail. Most federal tax audits are correspondence audits; only about 1 in 4 tax audits are conducted in person.

Comparison chart

Audit versus Correspondence Audit comparison chart
Edit this comparison chartAuditCorrespondence Audit
What is it? Audit is the evaluation of a person, system, organization or product done to determine its validity and authenticity. Correspondence Audit is the evaluation of a tax forms submitted by a person, system, organization or product done to determine its validity and authenticity.
Purpose To ensure information reported is accurate according to tax law To ensure information reported is accurate according to tax law
Selection Occurs if computer programs detect irregularities on the form, if there are an unusual number of deductions, or if randomly selected. Occurs if return contains one or two specific discrepancies with other forms, or if randomly selected.
Process Taxpayer meets auditor at home, at place of business or in an IRS office. Involves interviews, review of records, potentially interviews with related third parties. Taxpayer mailed either Letter 566 or CP 2000 notice and sends back required documents by mail.
Result Auditor explains findings and report in detail. Can be accepted or appealed. Auditor explains findings and report in detail. Can be accepted or appealed.
Taxpayers selected annually Approx. 0.25% Approx. 0.75%

Who gets selected for an audit?

Candidates for tax audits, whether in person or correspondence audits, are selected in the same way: either the selection is at random or a computer program detects an irregularity in the tax return. Taxpayers can also be selected for an examination audit if the tax authorities receive tips from informers that allege wrongdoing or tax evasion.

Odds of Selection

In general, less than 1% of all tax returns are selected for examination each year. This percentage varies depending on income, with higher likelihood for individuals with higher incomes. Out of all individuals or businesses selected to be audited, 25% undergo a traditional or examination audit, while 75% undergo a correspondence audit.

Tax Audit Process

In an in-person tax audit, an auditor will meet with the taxpayer multiple times at home, in their place of business or at an IRS office. They will review records, such as the minutes of company meetings and tax reports for different years, and may interview both the taxpayer and other individuals.

In a correspondence audit, the taxpayer receives either Letter 566 or a CP 2000 notice in the mail. Letter 566 advises the taxpayer that they have been selected for examination and lists the documents needed to verify the return. The taxpayer can return copies of these documents through the mail. The CP 2000 notice proposes changes to the tax return, based on information received from third parties. The taxpayer can either agree with the amended change or send additional documentation to prove that their initial return was correct.

Here are some good informational video explaining the process of Audit and Correspondence Audit:

Result of the audit

After an in-person examination audit, the auditor explains the findings and report in detail to the taxpayer. In a correspondence audit, the taxpayer receives a report in the mail. In both cases, the taxpayer can either accept the decision or file an appeal.

References

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