The IRS Office Audit

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Jason B. Freeman

Jason B. Freeman

Managing Member

214.984.3410
jason@freemanlaw.com

Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine , a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

The IRS Office Audit

Our last Insight article on IRS audits covered correspondence audits.  Here we will discuss the office audit.  When a tax return has been selected for office examination, generally the examination of the return will be conducted at the office of the IRS.  Normally a taxpayer will find an office examination has begun when the taxpayer receives a letter or telephone call from the IRS informing of such examination and that the IRS wants further records and information.  Returns selected for office examination present issues that require some analysis and judgment in addition to verification of records.  Examples of issues that are prominent in office examinations are:

  1. Dependency exemptions;
  2. income from tips, pensions and annuities, rent and royalties, partnerships, estates and trusts, and occupations where income not subject to withholding tax may have been received;
  3. determinations of whether income reported constitutes capital gain or ordinary income;
  4. deductions for travel and entertainment expenses;
  5. deductions for bad debts;
  6. determinations of basis of property; and
  7. complex miscellaneous itemized deductions such as casualty and theft losses where determinations of fair market value are required.

For whatever reason a return is selected for office examination, the IRS procedures impose substantial controls on the activities of the tax auditors, due to their limited education, training, and experience.  In fact, the tax auditor has had no control over the content, preparation, or issuance of the initial letter.  The taxpayer’s return is not assigned to an auditor until after the taxpayer replies, or until the day of or the day before the scheduled interview.  The auditor is given little time to prepare for the interview, and the examination is more or less limited to the items on the checklist contained in the letter.

The taxpayer will be required to meet the auditor at an office of the IRS.  The taxpayer or the taxpayer’s representative should only take to the audit those items that have been requested by the IRS.  The goal at the office audit is to complete the audit at the first meeting with the auditor and limit the audit to the issues set forth in the initial letter from the IRS regarding the audit.

Generally, gross receipts are required to be examined in all cases.  In addition, the office auditor may have questions regarding the taxpayer’s sources of income, standard of living, purchase of assets, balance of cash on hand and in the bank, payments on loans and receipt of borrowed funds.  Based on the answers received to these questions, if the auditor has reason to believe the taxpayer may be underreporting income, then alternative methods will be employed by the auditor to verify receipts.  If the examination reveals a material understatement of income in a given year, the examination may be expanded to subsequent or prior years and referred for criminal investigation.

When the interview has ended, resulting in a proposed adjustment, the taxpayer has an opportunity to agree with the findings of the tax auditor.  If the taxpayer agrees with the proposed changes, the taxpayer is asked to execute an agreement form that permits the immediate assessment of the tax.  The auditor will ask for payment of the amount of the additional tax.  If the taxpayer does not agree with the auditor’s findings, either the auditor or the taxpayer may request an immediate informal conference with the auditor’s supervisor or ask that the case be sent to the IRS Appeals Office.

Remember to keep good records which will help in any audit.