When it comes to taxes, the Internal Revenue Service (IRS) plays a crucial role in collecting revenue for the government. One of the ways the IRS ensures compliance with tax laws is through audits. The term “audit” can evoke fear and uncertainty in the minds of taxpayers but understanding what an IRS audit entails can help alleviate some of those concerns. Let’s explore what an IRS audit is, why it occurs, and how individuals and businesses can navigate this process.
What is an IRS Audit?
An IRS audit is an examination of a taxpayer’s financial records and tax returns to verify their accuracy and compliance with the tax laws. It is a systematic review conducted by the IRS to ensure that taxpayers are reporting their income correctly, claiming legitimate deductions, and meeting their tax obligations. The primary goal of an audit is to maintain the integrity and fairness of the tax system.
Why Does an Audit Occur?
The IRS selects tax returns for audit based on various criteria, including:
- a) Random selection: Some returns are chosen randomly to maintain the overall accuracy of the tax system.
- b) Document matching: The IRS compares the information reported on your tax return with the information reported by third parties, such as employers, financial institutions, or other payers.
- c) Related examinations: If your tax return involves transactions or entities that are already under audit, your return may be selected for examination as well.
- d) Red flags: Certain deductions or credits, such as high business expenses, excessive charitable contributions, or a significant change in income, can raise red flags and increase the likelihood of an audit.
Types of Audits
The IRS conducts audits through various methods, including:
- a) Correspondence Audit: The most common type of audit, where the IRS requests additional information or clarification through mail.
- b) Office Audit: In this type of audit, you are required to visit a local IRS office to provide supporting documents and answer specific questions.
- c) Field Audit: A more comprehensive examination conducted at your home, place of business, or your tax professional’s office. Field audits typically involve complex tax issues.
- d) Taxpayer Compliance Measurement Program (TCMP) Audit: These audits are rare and extremely detailed, involving an in-depth review of every aspect of your tax return.
What to Expect During an Audit
If your tax return is selected for an audit, you will receive a notification letter from the IRS specifying the type of audit and the information or documents they require. It is essential to respond promptly and provide the requested documentation. During the audit, you may need to meet with an IRS agent to discuss specific aspects of your return and provide explanations or supporting evidence. It is advisable to consult a tax professional who can guide you through the process and represent you before the IRS.
Possible Outcomes of an Audit
After conducting the audit, the IRS will reach one of three conclusions:
- a) No Change: If the IRS determines that your tax return is accurate, they will accept it as filed, and no changes will be made.
- b) Agreed Changes: If the IRS finds discrepancies or errors, they will propose changes to your tax return. You can either agree with these changes or provide additional documentation to support your original position.
- c) Disagreed Changes: If you disagree with the proposed changes, you have the right to appeal the IRS’s decision through an administrative appeals process or, if necessary, seek resolution in tax court.
MKS&H can Help Your Business Prepare in the Case of an IRS Audit
An IRS audit is not something to be feared if you have accurately reported your income and maintained proper documentation. However, if you are selected for an audit, it is crucial to respond promptly, cooperate with the IRS, and seek professional advice if needed. Understanding the audit process and your rights as a taxpayer can help you navigate through this potentially stressful situation. Remember, audits are a part of maintaining the integrity of the tax system and ensuring fairness for all taxpayers.
About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture and your business goals. This approach enables our clients to achieve their greatest potential.