It’s Back!
The IRS Revives the Random Audit Program

The IRS Revives the Random Audit Program
ill the Internal Revenue Service give one of your tax clients a scare worse than any Halloween fright they might get this October? The IRS is bringing back its formerly reviled random audit program this fall. A projected 13,000 taxpayers stand to have their tax returns closely examined in order to provide data for the IRS’s Discriminant Inventory Function System, its top-secret audit scoring program.
“Time consuming,” “excessively burdensome” and “expensive” were some of the milder adjectives used to describe the former random audit program that was discontinued in the mid-1990s after receiving universal criticism from taxpayers and tax preparers alike. Mark Mazur, the IRS director of research, analysis and statistics was recently quoted as saying that many of the new random audits “will probably cover more ground than a regular audit.” 

Affecting the future of audits
What will be the impact on you as a tax preparer and on your clients? At first very little, as the odds of being one of 13,000 individuals selected out of an estimated 136 million filers are very slight. However, this is just the beginning of what will become an ongoing reality of escalating detailed audits. The IRS has laid out its goals and objectives in its recently released report, “Reducing the Federal Tax Gap – A Report on Improving Voluntary Compliance.” Congress has approved a significant increase in IRS compliance funding. The likelihood of having a client audited will rise
in the years to come.
The chief target area for these and future audits will focus on taxpayers who meet the following criteria:
• are self-employed
• have businesses with high cash flow
• have zero withholdings on their income
• have income that is not separately reported to the IRS
These taxpayers, along with shareholders of closely held S Corporations,
will receive more audit scrutiny from the IRS. Another area that will take on importance in future audits will be the basis of assets sold and reported on the Schedule D. The IRS is very concerned about the problem of overstating the basis of sold assets.
Before there is a knock on your client’s door, learn more about how the IRS is supposed to treat audit subjects and about their expectations of taxpayers, and get to know some of the tricks the IRS will use in an audit. You’ll want to be familiar with taxpayers’ rights during the audit process, as there are more protections in place now than in the 1990s. A good starting point for your research is the Cohan Rule, a court ruling {Cohan, 8 AFTR 10552, 2nd Cir., 1930}, which still has an impact on dealings between IRS and taxpayers. Find more information at www.irs.gov.
Remember! If an Information Document Request (IDR) comes to your client
followed by an invitation to an IRS Examiner meeting, you want to be prepared to guide your client successfully through the IRS audit process.

About the Author: John Bosio is a Tax Analyst in Drake Software’s Tax Development department. He has been with Drake since 2005. John graduated with a degree in business (accounting concentration) from Michigan Technological University. He brings to Drake many years of experience as a tax preparer and accountant along with a background in tax software development.

From October 2007

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