Many people fear being chosen for a tax audit, imagining worst-case scenarios of mistakes, penalties, and endless paperwork. The anxiety around tax audits is understandable, but it often stems from uncertainty about how the process works. If you’ve ever wondered, “how does a tax audit work?” you’re not alone. Keep reading to better understand what a tax audit is and how it works.
What’s a Tax Audit?
A tax audit is an examination of a taxpayer’s financial records. It’s requested and conducted by a tax authority, like the Internal Revenue Service (IRS) or a state Department of Revenue. During the audit, the tax authority will verify the accuracy of the original reporting on your tax return by cross-checking it with your financial documents.
The chances of being audited are relatively low and have been declining over the years, but certain factors may increase your likelihood of being selected. Taxpayers most likely to be audited include those with annual incomes over $10 million, as well as low and moderate-income taxpayers claiming the Earned Income Tax Credit. If you’re selected for an audit, you’ll receive an audit letter in the mail with instructions on what to do and how your audit will be conducted (either in person or by mail).
Types of IRS Audits
If your audit is being conducted by mail, the audit letter will request additional information about certain items shown on your tax return, such as income, expenses, and itemized deductions. You’ll need to gather the required documents and mail them back to the IRS for review. If the requested documents are too numerous or complex to mail, you have the option to request an in-person audit, where you can meet with an IRS agent to present your records directly.
If your audit is being conducted in person, you’ll need to gather the same documents as you would for a mail audit, but you will present them directly to the IRS agent. There are two types of face-to-face audits: field and office audits. A field audit takes place at your home, business, or accountant’s office, where an IRS agent will review your records on-site. An office audit takes place at an IRS office, and you’ll need to bring your documents there for review.
Why Am I Being Audited?
Many taxpayers fear audits because they worry it means they’ve made a mistake or will face penalties. However, that’s not always the case. While the IRS will look for errors and can impose penalties and interest on unpaid tax, being audited doesn’t automatically mean you’ve done something wrong. The IRS uses several different selection processes. For example, you can be chosen by random selection for research and data purposes. Or, the IRS may select your returns if they involve transactions with other taxpayers who were also chosen for audit, such as business partners or investors. The audit process is simply a way for the IRS to verify that your tax return is accurate. If your records are in order and your tax return is correct, it may result in no changes or penalties.
Tax Planning in Worthington, OH
The best way to reduce your chances of being selected for a tax audit is by working with a tax professional who can ensure your returns filed are accurate and complete. At Royal Oak Financial Group, we are your trusted resource for tax planning and preparation. Contact us today to get the expert tax guidance you need!
