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Different Methods IRS can use to audit your tax return
The IRS uses different examination techniques depending on the facts and circumstances of each case. As a former IRS agent, here are some of the methods used on cases.
Indirect Method
The indirect method involves the use of circumstantial evidence to determine the tax liability based on omitted income, overstated expenses, or both. Circumstantial evidence is evidence from which more than one logical conclusion can be reached.
To support adjustments for additional taxable income, both the credibility of the evidence and the reasonableness of the conclusion must be evaluated before the determination of tax liability is made.
Analytical reviews and testing of the taxpayer’s books and records conducted during the minimum income probes may result in the identification of additional taxable income based on circumstantial evidence from which an inference can be made.
The Financial Status Analysis and Bank Account Analysis are not prohibited by IRC (Internal Revenue Code). Limitation on the Use of Financial Status Audit Techniques, simply because an adjustment to taxable income supported by indirect (circumstantial) evidence may be the result.
Examples
As an example: The minimum income probes for an individual business return includes a Bank Account Analysis . There is an identifiable potential source of additional taxable income. The records used for the analysis are the bank account statements, which are prepared by a third party, and are credible evidence. The characterization of excess funds as additional taxable income is reasonable because deposits of nontaxable funds are identified and eliminated.
IRS Audit – Listed Are Examination Techniques  Ft. Lauderdale, Miami, West Palm Beach
Formal Indirect Method
The formal indirect methods are audit techniques used to determine the tax liability based on the amount of unreported income.
a. Source and Application of Funds Method
b. Bank Deposit and Cash Expenditures Method
c. Markup Method
d. Unit and Volume Method
e. Net Worth Method
The formal indirect methods are also known as Financial Status Audit Techniques. They are distinguishable from other audit techniques by the following characteristics:
Reliance on indirect evidence of income,
In-depth analysis of actual costs that requires the extensive collection of detailed information, and
Subject to IRC 7602(e) , which states that “the Secretary shall not use financial status or economic reality examination techniques to determine the existence of unreported income of any taxpayer unless the Secretary has a reasonable indication that there is a likelihood of such unreported income.”
Formal indirect methods are appropriate when the taxpayer’s books and records are missing, incomplete, or irregularities are identified; or the Financial Status Analysis indicates a material imbalance of cash flows after consideration of other adjustments identified during the examination.
The IRS has many methods they employ, these are just a few to wet your whistle.
For more detailed information or for audit representation, call Fresh Start Tax at 1-866-700-1040.
We are former agents who have been down this road many times.
IRS Audit – Listed Are Examination Techniques  Ft. Lauderdale, Miami, West Palm Beach