What are the most common IRS audit triggers?
According to tax attorney Shamsey Oloko, the most common trigger for an IRS audit is underreporting income. When there’s a mismatch between what a taxpayer reports and what a third party (such as an employer or client) submits to the IRS via forms like the 1099, the system automatically flags the discrepancy. For example, if a taxpayer receives $450,000 in payments but only reports $200,000, the IRS computers will alert auditors to investigate further.
Other red flags include significant charitable deductions that are inconsistent with income and neighborhood averages. For example, if the average charitable contribution in a taxpayer’s area is $400 but they report $50,000, that anomaly could trigger scrutiny—especially if the individual is not known to be a high-giving professional such as a pastor. Whistleblowers may also initiate audits by reporting suspected tax avoidance in exchange for a portion of recovered taxes.
What are the different types of IRS audits and how intrusive can they be?
Shamsey outlined four main types of audits, each increasing in complexity and scrutiny:
- Correspondence Audits: These are the least intrusive and typically involve a letter requesting documentation for specific line items, such as charitable contributions. No phone calls or visits occur.
- Office Audits: Taxpayers are invited to an IRS office to answer questions about specific years. Professional representation is highly recommended.
- Field Audits: IRS agents visit the taxpayer’s place of business or home to review records, cash registers, and business operations. These audits can become intense and thorough.
- CCNP Audits (Comprehensive Compliance Net Project): The most exhaustive type of audit, requiring substantiation of every line item on the tax return. These are rare but extremely demanding and always require legal representation.
Some audits may begin as correspondence audits and escalate if discrepancies are found. In rare cases, audits can also have a criminal component, which may involve early morning raids, warrants, and potential prosecution. Shamsey described one such case where IRS agents raided a taxpayer’s office at 5:30 a.m., only for the case to later be dropped entirely after legal intervention.
What should you do first when you receive an audit notice?
Shamsey stressed that the first thing a taxpayer should do upon receiving an audit notice is to remain calm. Most audits are triggered by routine issues like minor errors or documentation mismatches. The next step is to contact a qualified tax professional—preferably a tax attorney—who can guide the response process.
For example, if a taxpayer mistakenly claimed $5,000 in charitable contributions instead of $500, a tax lawyer can help frame the correction appropriately and avoid escalating the situation. Legal professionals can speak on behalf of clients and help prevent taxpayers from unintentionally making incriminating statements.
Why is documentation so important during an audit?
Proper documentation is the foundation of audit defense. Taxpayers should always obtain and keep receipts for charitable donations and business expenses for at least three years. A lack of documentation makes defending audit claims difficult and can result in increased liability.
Shamsey emphasized that most taxpayers are not intentionally misleading the IRS. Often, errors occur due to misunderstandings or mistakes by tax preparers. However, taxpayers remain fully responsible for the accuracy of their returns. Every tax form includes a jurat—an oath declaring the information is true and complete—so even if a CPA made a mistake, the taxpayer is liable.
What mistakes can make an IRS audit worse?
One of the biggest mistakes taxpayers make is assuming they can shift blame to their CPA or tax preparer. Even if a preparer makes an error, the IRS holds the taxpayer accountable. For example, Shamsey often sees cases where a taxpayer unknowingly signs off on a return that includes fabricated business losses they never authorized.
These situations can spiral into complex legal issues requiring amendments, state-level coordination, and damage control. Trying to handle these cases alone or relying on preparers who aren’t tax attorneys can make matters worse.
How do CPAs and tax attorneys differ in an audit?
Shamsey clarified that while both CPAs and tax attorneys can represent clients during audits, the scope of their authority and knowledge differs significantly. A tax attorney is trained in statutory interpretation and litigation and can represent clients in tax court. This legal authority often deters aggressive IRS actions and can shift the dynamic of an audit.
For instance, if a tax attorney knows the IRS’s position is weak, they can threaten to take the case to court—potentially setting a precedent that the IRS wishes to avoid. This leverage can lead to quicker and more favorable resolutions.
What are the key takeaways for handling IRS audits?
Tax audits can be stressful, but understanding the process, seeking proper legal counsel, and keeping detailed documentation can make a substantial difference in outcomes. For taxpayers facing audits—or those who want to avoid future trouble—being proactive, honest, and professionally represented is the key to protecting themselves.
To learn more or to connect with Shamsey Oloko and the team at Thorgood Law, visit thorgoodlaw.com. Subscribe to the podcast for more insights and guidance, and don’t forget to leave a review and share this episode with anyone facing a tax challenge.
