What Is an IRS Field Audit?
A field audit is a comprehensive tax audit conducted by the Internal Revenue Service (IRS) at either the taxpayer's home, place of business or accountant's office, so they can examine your individual or business financial records to ensure you filed your tax return accurately.
- An audit is a thorough accounting of tax information to verify the accuracy of returns and the amount of taxes paid.
- The IRS conducts audits of a sample of taxpayers each year, either at random or if their returns trigger certain red flags.
- A field audit involves an in-person interview and thorough on-site investigation of tax-related documents and filings.
Understanding IRS Field Audits
The IRS routinely performs audits to verify the accuracy of a taxpayer’s return and specific transactions. When the IRS audits a person or company, it usually carries a negative connotation and is seen as evidence of some type of wrongdoing by the taxpayer. However, being selected for an audit is not necessarily indicative of any wrongdoing.
IRS audit selection is usually made by random statistical formulas that analyze a taxpayer's return and compare it to similar returns. A taxpayer may also be selected for an audit if they have any dealings with another person or company who was found to have tax errors on their audit.
There are three possible IRS audit outcomes available: no change to the tax return, a change that is accepted by the taxpayer, or a change that the taxpayer disagrees with. If the change is accepted, the taxpayer may owe additional taxes or penalties. If the taxpayer disagrees, there is a process to follow that may include mediation or an appeal.
Field Audit versus Correspondence Audit
A field audit differs from a correspondence audit in that a field audit is conducted in person rather than by mail, by an IRS Revenue Agent who will review your tax records for a particular year. It lasts from one day to a week, depending on the size of the taxpayer’s business.
Field audits are typically scheduled for more complicated audits and can be extremely intrusive. When auditing businesses, the revenue agent will also interview employees about the key operations of the business, including processes, accounting procedures, management structure and internal controls.
It is really important to be represented by a tax attorney – and/or the individual who prepared and filed the tax return — at the time of the audit, especially if there have been any understatements of income, overstatements of deductions or if your tax return contained false or misleading information. The penalties for a field audit that turns up errors or fraud include payment of additional taxes, liens on property, fines, garnishment, criminal investigations and court hearings. Most attorneys will advise you to keep answers as simple as possible and never offer additional information, as that could allow the agent to expand the scope of the audit.
The IRS has three years from the due date of the return to audit a taxpayer. There are exceptions. For example, if the taxpayer omitted more than 25% of the proper income from their return, the IRS has six years to conduct an audit. The IRS may also request extending the audit period, which gives the service additional time to gather information, and also the taxpayer additional time to appeal a determination.