There are three main types of IRS audits: correspondence audits, office audits, and field audits (listed in order of increasing invasiveness). Correspondence audits are initiated (and generally conducted) by postal mail. Office audits require a taxpayer and/or its representative to appear in an IRS office; and a field audit involves IRS examiners paying a visit to the taxpayer’s place of business.
Correspondence audits, as the name suggests, are conducted entirely through the U.S. mail. (The IRS never uses e-mail to correspond with taxpayers.) Correspondence examinations require less involvement from IRS examiners and are therefore used more frequently by the budget-strapped IRS. Because correspondence examinations make up such a large percentage of the total examinations the IRS conducts, they are considered the “work horse” of the IRS audit tools.
The IRS routinely uses correspondence examinations for issues that it generally deems more efficient and less burdensome to handle by mail, for example questionable claims for earned income tax credits (EITCs) or inconsistent line items.
Generally, office examinations involve small businesses or individual income tax returns that predominantly include sole proprietorships. They involve issues that are too complex for a correspondence audit, which involves only the exchange of mail and (sometimes) a few telephone calls. Issues subject to an office audit, however, are usually not complex enough to warrant a full-scale field audit examination. Common issues include the substantiation of a business purpose, travel and entertainment expenses, Schedule C items, or certain itemized deductions.
In addition, if a taxpayer previously selected for a correspondence audit requests an interview to discuss the IRS’s proposed adjustments, the case may be moved to the taxpayer’s district office. Conversely, an examiner may sometimes determine that a tax return selected for an office audit examination would be better handled through a correspondence audit.
Office examinations generally take place at the IRS office located nearest to where taxpayer maintains its financial books and records, which is generally its residence or place of business. However, on a case-by-case basis the IRS will consider written requests from taxpayers or their representatives to change the office examination location. A request by a taxpayer to transfer the place of an office examination will generally be granted if the current residence of the taxpayer or the location of the taxpayer’s books, records, and source documents is closer to a different IRS office than the one originally designated for the examination. Additionally, Treasury Reg. 301.7605-1(e)(1) directs the IRS to consider several factors including whether the selected office audit location would cause undue inconvenience to the taxpayer.
The IRS initiates a field exam audit usually by sending either a letter that lays out the issues to be examined and lists a specific IRS agent as the point of contact. Taxpayers must contact the revenue agent within 10 days of receiving the initial contact letter in order to schedule an interview. Generally an Information Document Request (IDR) also accompanies the initial contact letter and contains the IRS examiner’s description of the audit-related documents it wants to review.
Conducting a field examination of a tax return requires the agent to have far greater knowledge of tax law and accounting principles than do correspondence or office audits, and therefore, field examiners are generally much more experienced than other examiners. Field audits almost always take place where the taxpayer’s books, records, and other relevant data are maintained, which generally means the taxpayer’s residence or place of business. However, if a business is so small that a field examination would essentially require the taxpayer to close the business or would unduly disrupt the operation of the business, the IRS examiner can conduct the field examination at the closest IRS office or at the office of the taxpayer’s representative.