Stepping into the realm of tax laws can sometimes feel like venturing into a maze. To add to the complexity, if you’ve ever wondered what is a tax audit, you’re about to embark on a journey filled with many confusing intricacies. A tax audit is essentially a review of a business or individual’s requested financials and records to ensure that the information reported on tax returns is correct.
Decoding the Tax Audit
A tax audit is a review conducted by the Internal Revenue Service (IRS) or a state tax authority to verify that the information provided on your tax return is accurate. During an audit, a detailed examination of your records and financial information is performed. This examination ensures you’ve correctly reported your income, deductions, credits, and other tax items.
The selection process for an audit isn’t random; it typically follows statistical trends for similar cases or involves situations where the IRS has information that differs from what the taxpayer reported. Understanding the process can alleviate some of the apprehension associated with the term “audit”.
Reasons for a Tax Audit
Several factors can trigger a tax audit. These include inconsistencies or discrepancies in your tax return, high income, large deductions relative to your income, claiming 100% business use of a vehicle, or cash transactions over $10,000. An tax audit is not an accusation of wrongdoing, but rather a review process to verify information.
Remember, not all tax audits result in you owing additional tax. In some cases, you may even receive a refund if it’s found that you’ve overpaid. On the other hand, if the audit results in a tax assessment, you will be required to pay the amount assessed.
Navigating Through a Tax Audit
When you’re the subject of an IRS tax audit, it’s crucial to understand that cooperation and organization are key. If the IRS has selected your tax return for an audit, you’ll receive a notification by mail. It’s critical to respond to this notice promptly.
In preparing for the audit, gather all relevant documents, including receipts, bills, legal papers, loan agreements, and logs or diaries that substantiate the entries on your tax return. You might also consider consulting with a tax attorney to help you through the process.
The Outcome of a Tax Audit
The conclusion of a tax audit can swing in different directions depending on the circumstances. If the audit uncovers no discrepancies, or you can validate all examined items, then the auditor will make no changes and accept the original return as you filed. However, if the auditor suggests changes, you have the choice to either agree to those changes or contest them with further substantiation.
In cases where you agree with the suggested changes, the auditor will request that you sign their report with the changes. On the other hand, if you contest the proposed changes, you have the option to request an appeal or petition Tax Court.
Understanding what is an IRS tax audit is essential for anyone dealing with a tax audit. It’s a review process, not necessarily a red flag of wrongdoing. Staying organized, being honest in your tax filings, and seeking out a tax attorney can make the process significantly smoother.
