[Night Hides Not]

The most audited returns are those that report income from self-employment and claimed the Earned Income Tax Credit. All the IRS has to do is disallow some expenses for lack of documentation, creating a triple whammy on the poor taxpayer: greater SE income, more income tax and SE tax, reduction in EITC.

The poor taxpayer can't afford a CPA to prepare the return, so they blindly agree with what the agent says, just to stay out of trouble.

Conversely, I had a client who was going to retire, and raise racehorses full time. The first 3 years, the losses exceeded $100K, and he was audited. I spent 4 hours in the IRS office, educating the agent on the validity of the taxpayer's claims, demonstrating there was a business purpose for his losses.

The IRS had no choice but to agree with us, and allowed every penny of those losses. However, I told my client it was time for him to show from income from his venture, else he'd be exposed to hobby loss rules.

[Ken H]

What do they mean by audit? For example, a few years ago my accountant notified me that the IRS had disputed a small deduction. We both agreed it wasn’t worth contesting.

Does that count as an audit, or are they talking about a formal process?