Tax Audit Software: An Accountant’s Crystal Ball

January 19, 2023

Few words evoke the same level of dread in the hearts and minds of the average American than “IRS Audit”. Just say it out loud…you can practically hear the “here comes Jaws!” dum-dum-dum-dum. Composer John Williams described those familiar tuba notes as “grinding away at you, just as a shark would do…instinctual, relentless, unstoppable.” Sharks aside, that’s just how the notice of an impending audit feels for most taxpayers.

What Are the Chances of an IRS Audit?

An IRS audit is an official review conducted by the Internal Revenue Service (IRS) to verify tax returns or financial reports. An audit can happen anytime, as the IRS randomly selects tax returns for review. However, the chances of being audited vary depending on individual tax filing situations. While most taxpayers (around 70%) don’t get audited, some factors make taxpayers more likely to be selected for an audit than others.

For example, if a taxpayer fails to report income or files inaccurate tax forms, they have a higher chance of being chosen for an audit by the IRS. In addition, the IRS says, “Higher-income taxpayers face a greater chance of an audit.” That is, taxpayers who earn a high income or have excessive tax deductions are more likely to be audited than those with average tax filing situations. Other significant factors include significant changes in income or deductions from the previous year.

Reporting losses for four or more consecutive years
Self-employment
Substantial charitable gifts
Commingling personal and business expenses

Of course, years of missing returns are in danger of the IRS preparing them on their behalf. In addition, taxpayers who have a history of issues with the IRS are under additional suspicion. Ensuring your clients remain compliant with tax regulations and abide by all laws will reduce their risk of being selected for an audit.

Different Types of IRS Audits

As a tax professional, you might be called upon to guide your client through several types of IRS audits. These are the most common:

Office audits – This tax audit is conducted by IRS examiners who review tax return information at local IRS offices.
Correspondence audit – In this tax audit, the IRS sends questions and requests to taxpayers regarding discrepancies in tax returns.
Field audit – During a field audit, an IRS Agent will visit a taxpayer’s home or place of work to review tax returns and financial documents.

No matter the type of audit your client is subjected to, the process will likely trigger stress and anxiety. That’s where you come in. IRS Publication 1, The Taxpayer Bill of Rights says, “Taxpayers have the right to retain an authorized representative of their choice to represent them in their dealings with the IRS.” This applies to anyone being subjected to any variety of IRS audits. Tax audit representation is a specialized service in which an experienced tax professional will act as a client’s representative in dealings with the IRS before, during, and after the audit. Skilled professional support is critical to identifying and leveraging opportunities that can lead to a desirable outcome. Armed with a Power of Attorney, an audit representative can defend their client and appeal audit outcomes by:

Uncovering the error or issue that triggered the audit.
Determining if the client actually owes money to the IRS.
Gathering and preparing necessary documents.
Communicating on the client’s behalf.
Presenting and negotiating an Offer in Compromise.
Setting up an installment agreement.

The guidance you provide to clients facing scrutiny by the IRS is among the most valuable services you have to offer. Of course, grateful clients are happy to pay for your expertise and support. But what if you had the power not only to respond to a letter informing you of an impending audit but also to anticipate the IRS’s next move? With IRS Advance Notification™ (IAN) from IRS Solutions, you do, and it couldn’t be easier.

IAN is like a crystal ball that lets you see deep into the IRS. Once you’ve entered a client into your IRS Solutions database, you choose which of the complete list of more than 40 IRS Transaction Codes (TCs) you want to monitor for that person. You can even select all of them. The IRS Solutions system then looks for correlating changes to the client transcript and alerts you automatically when they occur. Those flags will give you the insights you and your clients need to prepare for an audit defense and other situations, including under-reported income, passport revocation, penalty and interest issues, and more.

Discover the Best Tax Audit Software for Your Practice

ABOUT THE AUTHOR

Suzanne Stone

Founder and Managing Partner

Suzanne is passionate about empowering clients with the tools and strategies they need for successful tax resolution. Suzanne is pivotal in developing innovative software solutions that streamline tax resolution processes, enhance client communication, and ensure compliance with IRS regulations.