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Well the answer to that is pretty much everything. Once you’re under examination, the government has pretty broad latitude to investigate anything they think is relevant. If you don’t provide something, then the IRS agent has the authority to issue a summons for something. A summons is a demand that you produce records. So let’s say you didn’t want to produce your bank records. The IRS could summons you and command you to bring them down or the IRS could summons the third party like a bank and demand production of that document. If for some reason you still didn’t produce the records after the summons, then the IRS could get district counsel involved and they can go to court and enforce the summons order. So what will happen a lot of the times is people will make a serious error on their taxes, like they’ll leave off income and then they won’t want to provide the evidence to the IRS to kind of hide their tracks. But the problem with that is the IRS in a lot of cases can get the information anyway so if you don’t provide it to them and make it easy on them, they’ll do it by force, so just understand walking into this that the IRS has very broad authority to gather the information it needs to conduct an examination. The government has given the IRS very broad latitude when it comes to audits because they want them to be effective so realize that if you’re asked to produce a document, you’re probably going to be asked to turn it over.

So the IRS has been processing tax returns and auditing people for a very very long time. It’s very good at auditing people and understanding that the government has limited resources. It really focuses on the areas where it thinks it can get the biggest win. The biggest win translates to how much additional tax revenue can we raise through examination, so the IRS has developed a statistical body of data points and depending on the relationship that your return has to those data points dictates how likely you are to get audited. So what happens is a taxpayer will file a tax return and that tax return will get scored by two methods that the IRS uses to score returns. One is called the day of to score and one is called a UI dif or just dif stands for discriminate income function. So what the IRS is looking for when it scores returns based on a dif score is the IRS is looking at the pretense or error in the taxpayers return. So for example if it sees expenses that are being taken that are not in line with you through the profession or not in line with the level of income that’s on the return or a couple of other factors, then that return will generally receive a high dif score and be subject to audit. A high dif score translates to we think, this return is of a higher propensity for error. When they do a UI dif score they’re looking at the propensity the return has high levels of unreported income. So the IRS uses those two scores, they select people based on where they fall within a data pool and then they kind of go from there determining who gets audited eventually. This is all computer-based. Eventually this gets to a manual reviewer and there’s a human being who looks through this and makes you see but the IRS uses statistics as much as possible to get a pool of returns that it feels are appropriate for audit and then it selects the quote-unquote low-hanging fruit: the ones that it thinks they can get the most adjustments out of.

We don’t know. So the IRS usually will start with one year if you get an audit notice and if there are multiple years, that’s an immediate red flag that there’s a serious issue. Generally speaking the IRS’s audit period has a three-year statute of limitations so the IRS generally doesn’t go back to more than three years when doing an audit. So if you actually went to the IRS and you talked to an auditor and you had them show their initial file when the IRS selects your return for audit, what happens is there’s a three year comparison of income and certain items that are on the return. So the IRS is generally looking for audits from a three-year perspective. Most audits will go three years. Now in the case that there’s a substantial underreporting of income, then the IRS will go back up to six years. If the government feels that the taxpayer has committed fraud then the IRS can technically go back indefinitely but it’s only in those cases that will they go back longer than the three-year period. If there is a substantial understatement then they will go back up to six but generally speaking they keep it within the three-year mark. So again what they usually do is they’ll start with a year, they’ll see if there’s errors in there because the government is not about creating more work for itself than it needs to, and then if they find errors in one year they’ll open up the entire audit period. If they find substantial underreporting of income then they’ll open up a six year period but that’s generally how long the government is going back when in audits tax returns.

So the first thing that we say to our clients is that you have the advantage in an audit. Number one, you’re the taxpayer and number two, you have access to all the documents so the government is put in a position where they’re asking you for records. You have the opportunity to control both the scope of the information that’s being provided and to control what information you provide so you’re controlling the scope and you get to edit out within that scope what actually gets provided. You have a lot of choice. What I tell our team is “you can’t control bad cards.” So for example if a tax return is unreported by $100,000 in income, you’re probably not going to be able to hide that but the advantage that you get in an audit is you can control the order in which the cards are being dealt. So the very first thing that we do in an audit is we like to know why the taxpayer has been audited. We look at the return and then we go through a pre audit, so we put the tax return through the same level of scrutiny. We’re actually using more scrutiny than what the IRS is going to put it through so we’re looking for issues that could come up. We’re determining whether things are a big deal, a little deal or not a deal at all and so we’re actively looking at those issues and we’re pre-screening things. Once we pre-screen things, then we develop an audit strategy and this has nothing to do with the IRS. This has to do with how are we going to present

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