Who Does the IRS Audit?

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Who Does the IRS Audit?

The IRS Audit and the receipt of IRS notices seem to be becoming more and more prevalent among Atlanta taxpayers.

The IRS regularly examines third party documentation to identify income that is missing on tax returns.  Most commonly, this includes 1099’s and W-2’s.  This the cause of millions of IRS notices that go out to taxpayers every year.

IRS Audit Triggers

The IRS has a computer scoring system for identifying taxpayers to audit.  This is called the Discriminant Function System, or “DIF.”  The DIF program gives each return numeric “scores” which identify the red flags among the masses of data on hundreds of millions of tax returns.  The red flags are those deductions that are beyond what the IRS considers to be normal.  This is based on taxpayers with similar jobs and similar income levels.  If the DIF identifies an obvious discrepancy, the chances of a tax audit are much higher.

IRS Audits and the Summons

Another tool that the IRS has to identify non-compliant taxpayers is the “summons.”  The IRS uses a summons to obtain information about a specific taxpayer whose identity is known.  In general, the IRS issues summonses only when the taxpayer (or another witness) will not produce the desired records or other information voluntarily.

In addition, the IRS has an even more powerful investigative tool to track down tax evasion, the “John Doe summons.”  The IRS uses the John Doe summons in a variety of situations where a broad class of taxpayers is the target of the investigation. It is used to obtain the names, requested information, and documents concerning all taxpayers in a certain group when the identity of specific individuals is not known.

John Doe summonses require US District Court approval.  Therefore, the IRS Office of Chief Counsel maintains the files associated with these cases.

Examples of the John Doe Summons

The IRS has used John Doe summons to obtain lists of investors in tax shelters, owners of tax-exempt bonds, or account holders at financial institutions.

For example, in 2016 a federal court in the Northern District of California authorized the IRS to serve a John Doe summons on Coinbase Inc., seeking information about U.S. taxpayers who conducted transactions with virtual currency.  According to a representative of the Tax Division of the Justice Department, “tools like the John Doe summons authorized today to send the clear message to U.S. taxpayers that whatever form of currency they use – bitcoin or traditional dollars and cents – we will work to ensure that they are fully reporting their income and paying their fair share of taxes.”

Our firm is aware of a John Doe summons of check cashing companies that triggered a series of recent taxpayer audits.  The purpose of the John Doe summons was to identify those people who cashed checks and for how much.  As a result, the IRS audited these people to determine if they reported the checks as taxable income on their returns.

Other IRS Audit Tools

IRS examiners utilize a variety of external sources as part of the audit.  Examples include:

  1. Bureau of Labor Statistics
  2. Social Security Administration
  3. Post Office Database (for shipping records and money order purchases)
  4. Department of Motors Vehicles (how many vehicles do you have?)
  5. Social Media (do you highlight a business that the IRS does not know about?)
  6. Google, Yahoo and other search engines
  7. State licensing databases

In short, the IRS has many tools at its disposal to audit taxpayers, as well as to identify non-filers.

Feel free to reach out to our accounting firm in Atlanta, Georgia for assistance with audits and IRS tax matters.

For a more general discussion of the IRS audit process, see our article on IRS Audits.

By Gary Massey, CPA

Founded by Gary Massey, CPA, Massey and Company is a boutique CPA firm is located in Atlanta, Georgia serving the needs of small businesses and individuals.  Our services include tax preparation, tax planning, taxpayer representation and IRS audits.  We also provide small business accounting services to companies throughout Georgia.

Massey and Company CPA

Based in Atlanta and Chicago, Massey and Company CPA specializes in tax and accounting matters of small businesses, entrepreneurs, and their families.
We do everything related to tax return preparation and tax planning, as well as accounting and bookkeeping for small businesses using QuickBooks Online.
In addition, we represent taxpayers before the IRS, keeping taxpayers out of tax trouble. We negotiate with the IRS and the state, so you do not have to.
We know the tax issues. We know our way around the IRS. We know QuickBooks. And we know how to help you save taxes and keep more of your hard-earned profits.

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