AUDIT
A systematic examination of financial or account-
ing records by a specialized inspector, called an
auditor, to verify their accuracy and truthfulness.
A hearing during which financial data are investi-
gated for purposes of authentication.
The INTERNAL REVENUE SERVICE (IRS) con-
ducts two types of audits, called examination of
taxpayer returns, and they are typically con-
ducted using one of two types of procedures.
The most common auditing procedure involves
correspondence between the service and the tax-
payer or interviews with the taxpayer in a local
IRS office. A less common method involves field
audits whereby IRS officials conduct the audit at
the taxpayer’s home or place of business. Treas.
Reg. § 601.105(b)(1). The service determines
which audit procedure should be followed in a
particular case. During an audit, an IRS official
may question the taxpayer about a particular
transaction or transactions that appear on the
taxpayer’s return or may conduct a thorough
investigation of the taxpayer’s entire tax return.
Although many people fear audits by the
IRS, the percentage of returns examined by the
IRS is relatively low. For example, of 108,034,700
returns filed by taxpayers in 1997, the IRS exam-
ined 1,662,641, or about 1.5 percent of the total
number of returns. Despite this low number,
several stories surfaced in the 1980s and 1990s
regarding abuses by IRS officials,many of which
occurred during the audit process. Congress
responded by enacting two “Taxpayer Bill of
Rights,” first in 1989 and again in 1996. The sec-
ond act, the TAXPAYER BILL OF RIGHTS 2, Pub. L.
No. 104-168, 110 Stat. 1452, established and del-
egated authority to the Office of Taxpayer Advo-
cate. This office is responsible for assisting
taxpayers in resolving problems with the IRS,
identifying areas where taxpayers have had
problems with the service, and identifying
potential legislative and regulatory changes that
could mitigate problems between the IRS and
