What is a Tax Audit?

A tax audit is a review of a taxpayer’s tax return by a tax authority, such as the Internal Revenue Service (IRS) or a state tax agency. The purpose of a tax audit is to verify that the taxpayer has correctly reported their income and deductions, and to ensure that they have paid the correct amount of tax.

Tax audits can be random, but they are more likely to be triggered by certain factors, such as:

  • Large or unusual deductions
  • Inconsistent income or deductions from one year to the next
  • Mathematical errors on the tax return
  • Business losses
  • Self-employment
  • High-income taxpayers

There are three main types of tax audits:

  • Mail audits: This is the most common type of audit, and it is typically conducted through correspondence. The taxpayer will receive a letter from the IRS or state tax agency requesting additional information or documentation.
  • Office audits: These audits are conducted in person at a tax office. The taxpayer will meet with an auditor and review their tax return in detail.
  • Field audits: These audits are conducted at the taxpayer’s home or business. The auditor will review the taxpayer’s records and interview the taxpayer and any employees.

If a taxpayer is selected for an audit, it is important to cooperate with the auditor and provide all of the requested information and documentation. If the taxpayer does not cooperate, the auditor may make assumptions that could lead to additional taxes or penalties.

Most tax audits result in the taxpayer owing no additional tax or penalties. However, if the auditor finds that the taxpayer has underpaid their taxes, they will issue a notice of deficiency. The taxpayer has the right to appeal the notice of deficiency, but they will also be required to pay the additional tax and penalties unless they are able to successfully appeal.

Tax audits can be stressful, but they are a normal part of the tax process. By being prepared and cooperating with the auditor, taxpayers can minimize the inconvenience and stress of an audit.