The notice comes in the mail saying that your return has been selected for audit. Along with the notice is the one page laundry list of items that you are expected to bring to the audit and a date scheduled for the audit. And this is for a tax return you filed 2 years ago.
Audits range all the way from correspondence audits (letters asking for more information) to field audits where the IRS comes to your place of business. None are fun for the taxpayer. And auditors come with the built in perception that you made an error on your return and owe more tax. Their job is to raise money for the US Treasury. They would not be auditing your return unless they thought they could find errors that resulted in an additional tax assessment.
All tax returns are computer audited. Each item on the tax return is assigned a score (called a DIF score). If the DIF number gets large enough the return is pulled for a human to look at it. If the examiner is satisfied that the return items flagged seem okay, the return is put back into the queue for further processing. Other returns are pulled for audit because the IRS has determined that it wants to audit 8000 returns matching certain criteria in a specific region. The 8000 with the highest DIF scores are pulled and assigned to various district offices. Then the Revenue Agents (tax auditors) go to work. They start down the list and begin setting appointments. When they arrive all income and expense items are carefully scrutinized using the most conservative approach possible. And the auditor can expand the scope of the audit if he/she believes that it would be more productive (for the IRS) to look at other items not on the original list.
Under the new restructuring of the IRS auditors will be specifically trained in auditing the type of return you filed. Wage earners will be audited by a separate division from the self-employed or small business person. Regardless of the type of auditor, he/she will be well versed in the areas of your return that have raised additional money for the IRS from previous audits of the same type of return. They will know exactly what they are looking for. It is critical that you know in advance what areas they are most likely to concentrate on and what parts of the law protect you as a taxpayer. Do not ever count on the IRS to help you understand tax law unless it works in their favor. Only your advocate is going to do that.
Even audits that did not go your way are not always lost. Audit results can be appealed and closed audits can be reopened with good cause. Your representative can work with you on all your options, even if you lost your last audit. I can not even imagine facing the IRS without the assistance of a trained professional. And keep in mind, without a subpoena you do not have to even go to the audit. Most are handled by our representatives. We can generally schedule field audits to be conducted in our offices so as to not disrupt your work place.
Information about the IRS audit guide for shareholder loans.