[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?

[Night Hides Not]

When I think of an audit, it involves a face to face meeting with an agent. Correspondence through the mail, or via phone is often included by others as an audit.

Matter of perspective.

[asinclair]

What do they mean by audit?

As I recall, there are broadly two types of audit. The first audit is a query about specific items in the return, or information the IRS believes is missing. The second type of audit is the research audit, where the IRS goes over EVERYTHING in your return.

I'm not a tax expert by any means, but the first form of audit is used on "the little guy" and is based on all the reports sent to the IRS from service providers (think banks, employers, clients, brokers) about your business with those providers. The times I've been audited, it's been a letter from the IRS and perhaps a phone call.

The 1% audits, on the other hand, may well be full-blown research audits, or cover so many IRS irregularity claims, that it takes many man-hours of both taxpayer and bureaucrat time.

Research audits can backfire. One of my accountants told me a story about one of his clients who was subjected to a research audit. Two weeks and 7 years worth of tax returns later, the IRS ended up owing the taxpayer around eight hundred thousand dollars. So there is a risk. (Don't know all the details.)