Understanding Audits: A Guide for Service-Based Businesses and Nonprofits

The Three Main Types of Audits

Audits generally fall into three categories: correspondence audits, office audits, and field audits. Each type varies in complexity, scope, and the level of interaction required.

Correspondence Audits

Correspondence audits are the most common and least invasive type. They happen through mail, where the tax authority requests additional documentation or clarification about specific items on your tax return. This could include receipts, bank statements, or explanations for certain deductions.

• Scope: Limited to specific issues or line items.

• Process: You respond by mail with the requested documents.

• When it happens: Usually triggered by minor discrepancies or missing information.

  
  

Correspondence audits are often straightforward, but it’s important to respond accurately and promptly. Mistakes or delays can lead to further scrutiny.

Office Audits

Office audits require you to visit a local tax office to meet with an auditor. These audits are more detailed than correspondence audits and may cover multiple areas of your tax return.

• Scope: Broader than correspondence audits, but still focused on specific issues.

• Process: Face-to-face meetings with the auditor, where you provide documents and answer questions.

• When it happens: When the tax authority needs more information than can be handled by mail.

  
  

Office audits can be intimidating because of the personal interaction and the depth of review. Being organized and prepared is key.

Field Audits

Field audits are the most comprehensive and invasive type. An auditor visits your home, business, or accountant’s office to examine records and interview you or your staff.

• Scope: Extensive review of your financial records and tax returns.

• Process: On-site examination that can last days or weeks.

• When it happens: Usually triggered by significant discrepancies, complex returns, or suspicion of fraud.

  
  

Field audits require the most preparation and can be stressful. They often involve a detailed review of your entire financial situation.

When to Consult a CPA

A CPA is a licensed accounting professional who can help you prepare for and respond to audits. They understand tax laws and audit procedures and can represent you before the tax authority.

You should consider consulting a CPA if:

• You receive an audit notice and feel unsure about how to respond.

• The audit covers complex financial transactions or multiple tax years.

• You want to ensure your responses are accurate and complete.

• You need help organizing records and preparing documentation.

• The issue is about income, deductions, credits, or accounting records.

• You’re responding to CP2000 notices (income mismatch).

• You need amended returns or corrected filings.

• You want professional representation during office or field audits.

  
  

CPAs can negotiate with auditors on your behalf, potentially reducing penalties or resolving issues more quickly.

When to Consult a Tax Attorney

A tax attorney specializes in tax law and can provide legal advice and representation, especially when audits involve potential legal risks.

Consult a tax attorney if:

• The audit raises questions about possible tax fraud or criminal charges.

• You face significant penalties or back taxes.

• You receive a summons or legal notice related to the audit.

• You want to protect your legal rights during the audit process.

• You need help negotiating settlements or appeals.

• The case involves collections (liens, levies, seizures).

  
  

Tax attorneys can work alongside CPAs to provide a strong defense and ensure your case is handled with legal expertise.

Practical Examples of Audits

Imagine you receive a letter from the tax authority asking for proof of charitable donations claimed on your return. This is a correspondence audit. You can respond by sending receipts and letters from the charities. If you feel unsure, a CPA can help you gather and present the documents correctly.

If the tax office requests a meeting to discuss your business expenses in detail, you are facing an office audit. A CPA can prepare you for the meeting, review your records, and represent you during the discussion.

In a more serious case, if an auditor visits your business to examine all financial records and interviews your employees, this is a field audit. At this point, involving both a CPA and a tax attorney is wise. The CPA manages the financial review, while the attorney handles any legal issues that arise.

Tips for Handling Audits

• Respond promptly to all audit notices.

• Keep detailed records of all communications and documents sent.

• Be honest and clear in your responses.

• Seek professional help early to avoid mistakes.

• Understand your rights during the audit process.

  
  

Summary: Navigating Audits with Confidence

Audits come in three main types: correspondence, office, and field audits. Each requires a different level of preparation and interaction. Knowing when to involve a CPA or tax attorney can protect you from costly mistakes and legal trouble. CPAs help with financial accuracy and representation, while tax attorneys provide legal defense and advice. Facing an audit with the right support can ease the process and improve your outcome.

Your Partner for Success

---