Field examinations involve returns with more complex issues, thereby requiring examination by someone more knowledgeable in the field of accounting and the Internal Revenue laws. Field examinations are conducted by Revenue Agents and are normally performed at the taxpayer’s place of business where the Revenue Agent can examine the taxpayer’s books and records and decide on the taxpayer’s correct taxable income and correct tax liability. The Revenue Agent is supposed to make an appointment with the taxpayer at a time and place that will be convenient for the taxpayer. The arrangement of the time and place can be done by telephone; however, the telephone contact cannot be used to verify items appearing on the income tax return.
A return assigned to a Revenue Agent has been computer classified as having audit potential and has been selected because the return has a greater likelihood than others for tax change. Accordingly, the Revenue Agent believes from the onset that the return assigned for examination contains errors in need of correction. In addition, most Revenue Agents believe it is their duty to assert the IRS’s position on issues and to “educate” the taxpayer or his representative. At the beginning of the examination, the Revenue Agent is directed to ask whether the taxpayer has any questions regarding the audit process. At this time, the taxpayer should be assured that the examination of his return does not necessarily mean the IRS suspects dishonesty or criminal activity.
It is important to note that the Revenue Agent cannot promise a taxpayer that his books and records will be used solely for civil purposes. Should the taxpayer insist that his books and records not be used for any other purpose, the Revenue Agent will try to find out the taxpayer’s reasons, will discontinue the examination and will report the matter to his supervisor.
The first step in the Revenue Agent’s examination is the identification of unusual items requiring further verification. The IRS has instructions and guidelines which place heavy emphasis on the examination and analysis of substantiating records.
The second step of the Revenue Agent’s examination is to verify the accuracy of amounts reported or required to be reported as taxable income, and the accuracy of any credits claimed against the tax due. The Revenue Agent is instructed to continue the examination to a point where he can conclude that he has considered all items necessary for a substantially proper determination of tax liability. As in the office examination, if during the field examination a material understatement of income should be revealed each year, the Revenue Agent will discuss with his supervisor the expansion of the examination into prior years and possible referral for criminal investigation. All examinations with understatements of income in must be brought to the attention of the Revenue Agent’s supervisor.
As the examination draws closer to the end, there is a good chance the Revenue Agent will not search further for other adjustments due to his obligation to complete the examination. Therefore, some representatives believe that delays during the examination can be an advantage to the taxpayer since the Revenue Agent might cut the examination short if he has insufficient time within which to complete his examination.