What is a Tax Audit?

In the USA, a tax audit is a detailed examination of an individual and business tax return by the IRS (Internal Revenue Service) or state authority. Meanwhile, the purpose of this tax inspection is to ensure compliance with tax laws and regulations. However, the tax system is complicated, and most people need clarification upon hearing the word tax audit or income tax audit.

Nevertheless, understanding the tax audit is essential for the success of the business and to avoid any penalty. Consequently, the awareness of the tax system and tax audits allows individuals and companies to get a better grasp of finances and minimizes stress. So, the question is, what is a tax audit? In this post, we will delve deeper into tax audits to understand the whole process.

What is a Tax Audit? 

There is a common misconception that audit is an extended ordeal and has negative consequences. However, the truth is the opposite of it. It does not mean that one morning, an IRS would show up at your door with a long list of taxes and troubles. A tax audit is defined as the examination of an individual’s and business tax returns to verify financial records.

Tax audits are performed not only by the IRS but also by government agencies, payroll tax departments, and the state tax department. There are different types of tax audits, and they range from simple to extensive documentation for proof and investigation. When you receive a notice of tax audit, it does not mean something is fishy unless you have some unusual business or high income. If this is the case, there are chances of an income tax audit.

What are the Types of Tax Audits?

All tax audit processes are not the same. They depend upon the information and analysis, your particular situation, or the identified issue. Nevertheless, depending on the situation, there are four main types of audits.

• IRS Correspondence Audit 

The Internal Revenue Service Correspondence audit or the Campus Examination represents about 75% of the commission’s tax investigation. This audit involves many issues with corporate and individual tax returns. This audit is specifically for non-profit organizations and philanthropic companies involving a small amount of money. You may receive a letter or an email if you have a high charitable amount in comparison to your income. You will receive a 566 letter with a Schedule C form demanding additional information on your expenses and charitable donations. 

• Office Audit 

This audit holds face-to-face meetings at the Internal Revenue Service. This is one of the toughest audits and demands a quick resolution to the problem. If you need help with business revenue or income, you may end up in the IRS office. The initial notification for this audit comes through an email or letter. However, you have to meet the IRS agent in the office. 

• Field Audit 

Another name for this audit is field examination. This examination involves a meeting between the IRS auditor, your CPA agent, and you. This investigation covers many areas, so be ready with the proof of everything. 

• Taxpayer Compliance Measurement Program Audits 

This audit is simple, and it is where an agent examines everything in your life that may have an impact on the taxable income. This may include showing your birth certificates or marriage certificates.

What Triggers a Tax Audit? 

These are the following reasons that may bring you under the radar of the IRS. 

• If your income is not reported correctly on the papers. 
• Unusual business activity or income. 
• Lavish business expenses for meals and entertainment purposes. 
• A drop in the income from the last year. 
• Considerably high charitable amounts. 

Tax vs. Audit 

Taxes refer to financial obligations that an individual or a business owes to the government, including income tax, sales tax, property tax, etc. On the other hand, audits refer to the independent examination of financial records to ensure the accuracy and reliability of reporting. 

What does it mean your taxes get audited? 

You have nothing to worry about this. However, your taxes get audited, meaning you have to meet the IRS agent at their office, your office, or the home to discuss financial records and information. You will have to present everything from birth certificates to shopping receipts. The consequences of auditing may include tax refund audits, penalties, or bills.

Conclusion 

Taxing and auditing go hand in hand. Where there is taxing, there is auditing. It might be challenging to go through the process of verification again and again despite giving all the proof. However, you may avoid this additional stress by hiring a professional who looks after taxation and auditing. The professional bookkeeper is responsible for maintaining a record of all financial details. H&M Tax Group offers taxation and auditing services. Thus, you may rest while they do the work.