Study Finds Location Matters When it Comes to IRS Audits

It appears the old “location, location, location” adage for real estate holds true in the world of taxes as well. A recent study by professors out of two prestigious universities in the great state of Texas, the University of Texas at Austin and Texas A&M University, have found that the location of a business can impact the likelihood of a tax audit.

More specifically, the closer the proximity of the corporate headquarters of a company to an Internal Revenue Service (IRS) office, the greater the likelihood of a tax audit.

Digging into the study: What did the data reveal? Researchers with the study point to what they call the “network effect.” Essentially, this refers to the fact that two parties in close proximity tend to know more about each other. This base level of knowledge, the researchers speculate, has translated to an increased likelihood of an audit of businesses that are in close proximity to an IRS office.

What is the purpose of this study? A piece in Accounting Today notes that the findings were released with the intention of providing the IRS with information. The researchers are hopeful that the data will help guide the agency’s evaluation of how it organizes enforcement efforts.

What does this mean for future enforcement efforts? It is difficult to predict future methods employed by the IRS. As noted at the end of the piece, the IRS “has its own private information and compliance models that are not publicly available.”

However, this publication could result in the IRS adjusting the way it moves forward with choosing the companies it audits in the future.

What should I do if my business receives notification of an IRS audit? Whether in close proximity to an IRS office or not, notification of an audit by the IRS should be taken seriously. If not handled properly, an audit can translate to an unnecessarily large tax bill and the potential for criminal prosecution. A tax attorney can help mitigate these risks.

How can a tax attorney help if my business faces the threat of an IRS audit? An attorney can help in a number of ways. One of the first things an attorney will likely do to reduce these risks is conduct a careful review of the language of the notification. This review will likely lead to a challenge of the assertions made by the IRS, which were used to support the audit.

The exact method employed by your legal counsel will depend on the details of the situation. As a result, it is wise for those who find themselves facing an audit to seek the expertise of a tax lawyer.