The 3 Flavors of Audits
If you got an audit letter from the Internal Revenue Service (IRS) and have gotten over your panic (see related story, p. 102), you might want to know about the three different types of audit:
1. Mismatch of information.
This is the most common type, where the information provided to the government doesn't match what is on your return. "These are the easiest to deal with," says Brent Thomas, CPA, an accountant with Thomas Doll & Associates in Walnut Creek, CA. "Usually, you can provide a reasonable amount of documentation to the IRS and make it go away."
For example, IRS auditors may say you didn't report interest income from a particular bank account. But you realize that is from a pension plan. A letter from the bank will usually suffice to resolve the issue.
2. High red-flag score.
Every line of your audit can be compared to a national average. If you come up with a high score - meaning your information is outside the norm in many areas - you have a higher likelihood of being audited, says Thomas. The IRS will ask about certain items - usually five to 15 will be questioned - and you will have to provide evidence that your data are correct.
3. Random selection.
This is the toughest of the bunch, says Thomas. "These are really in-depth. But the good news is that these usually relate to personal, not business returns."