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What is a tax audit?

Receiving a notification for a tax audit can naturally cause some anxiety. Understanding what a tax audit involves can help alleviate your concerns and prepare you for the process ahead. If the IRS has notified you of an audit, it’s helpful to understand the process and prepare accordingly.

Defining a tax audit

A tax audit is an examination that a tax authority, such as the IRS, conducts to verify the accuracy of a taxpayer’s tax return. The primary goal of an audit is to ensure taxpayers have reported their information correctly according to tax laws and have paid the correct amount of tax.

Reasons for a tax audit

Various factors can trigger a tax audit. Sometimes the IRS selects taxpayers at random; other times, discrepancies or anomalies in a tax return, such as unusual deductions, excessive expenses, or incomplete information, may prompt an audit.

Types of tax audits

There are three main types of tax audits, each varying in intensity and requirements:

  • Correspondence audit: This is the simplest form of audit, typically managed through mail. The IRS may request additional documentation or clarification on certain aspects of your tax return, like charitable deductions or tax credits.
  • Office audit: This more detailed audit requires you to visit an IRS office. It usually involves broader questioning about your tax return and may include requests for more extensive documentation.
  • Field audit: The most comprehensive audit type, where an IRS agent will visit your home or business to conduct a thorough review of your financial records and practices. This type of audit generally applies to complex tax situations.

What to expect during a tax audit

During a tax audit, the IRS will ask you to provide records and documentation to support entries on your tax return. You might need to present receipts, invoices, ledgers, and other relevant financial records. The auditor will check these documents to ensure accuracy and compliance with tax laws.

Managing your tax audit well

Understanding what a tax audit is can significantly reduce your stress if you face one. Learning more about the types of audits and their triggers may allow you to prepare effectively and respond confidently if the IRS contacts you.