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Handling the Sensitive Issue IRS Audit

The IRS remains well equipped to identify potentially fraudulent returns as a result of increased transaction and information reporting, better developed audit plans and techniques that focus on specific industries, substantially increased access to computerized data banks and an overall increased level of scrutiny of the taxpayer, the taxpayer’s business, the taxpayer’s standard of living and how these relate to issues reported — or not — on the return under examination. The potential fraud/criminal exposure is often based on items such as unreported income, improper deductions or some other false or inaccurate statement on the return or the overall economic lifestyle of the taxpayer.Electronic information reporting and basic internet searches have enhanced the ability of the IRS to ferret out potentially sensitive issues. With respect to taxpayers involved in cash-intensive businesses (restaurants, bars, etc.), or Schedule C businesses, there has been a movement away from the mechanical examination of a return in favor of a somewhat generic investigation of the taxpayer’s overall financial activities.The approach of auditing a taxpayer, rather than a return, represents an attempt by the IRS to increase compliance and search out potentially fraudulent situations. Appropriate preparation involves a detailed review of the taxpayer’s standard of living, accumulated wealth, economic history, the business environment and activities of the taxpayer, nontaxable sources of income available to the taxpayer, system of internal controls, an effort to reveal transactions with related taxpayers, etc.