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Audits and angst: IRS instills more fear than love at tax time

"It is better to be loved than feared," Machiavelli advised in his famous essay "The Prince."

Several centuries removed from Renaissance Italy, and on another continent, the counsel still resonates.

No one would say that the IRS is loved. But as we have argued week by week in this blog, the IRS is on the verge of a Machiavellian dilemma. The more the agency has to cut back on customer service efforts, the more it will have to rely on the threat of audits and other enforcement tactics to ensure tax compliance.

In this post, we will revisit the issue of IRS audits in order to remind you of some key points as tax-filing season moves inevitably toward the April 15 filing deadline

First of all, it is important to realize that there is no such thing as a generic IRS audit. As we explained in our June 21 post last year, there are several different types of IRS audits.

Laura Saunders of the Wall Street Journal took up a similar theme recently. The types of audit include:
• Less-formal "math error" letters from the IRS
• Correspondence audits
• Field audits
• Research audits

Math error letters are not considered formal audits. But they can be intimidating to taxpayers, as National Taxpayer Advocate Nina Olson has noted.

Correspondence audits are conducted through the U.S. mail. To be sure, this is the age of e-mail and text messaging. But the IRS has made clear to taxpayers that it will not initiate contact with them through those means.

Correspondence audits are the most common type of tax audit by a wide margin. They accounted for about 70 percent of all audits last year and typically focused on a particular issue or information request.

Field audits, by contrast, involve face-to-face encounters between taxpayers and IRS agents. Obviously a direct interaction like that can raise one's anxiety level.

But in some ways so-called "research audits" are even more intrusive than field audits. Taxpayers subjected to research audits are randomly selected - which means they can seem arbitrary, as if the IRS were on a fishing expedition.

Source: The Wall Street Journal, "Are You Ready to Be Audited?" Laura Saunders, March 14, 2014

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