What is an Audit and Why Should You Care?

One of the basic duties of the IRS is the audit, a routine check on selected individuals and business entities to determine if they correctly declared their income and paid the proper taxes. The IRS does not randomly choose tax payers who are up for audit. The list of individuals up for an IRS audit is generated by the IRS computers and the list is based on information contained in the tax returns filed with them. The computers check the returns and claims for any likely errors and rank them accordingly. Tax payers that rank high in the list are more likely to be subjected to an audit.

One of the cases that can raise red flags is a low declaration of income that is accompanied by a huge claim for deductions (expenses). Therefore, if you have been spending more than what you earn, you can almost expect the IRS to be knocking at your door anytime soon.

Do not panic in case you receive notice of an IRS audit. It does not imply that the IRS suspects you of being a fraud or a tax evader. The IRS only wants to verify your claims and check the accuracy of its records to spare you of any future problems. There are three kinds of IRS audits, and what you will be subjected to depends on your income declaration.

Correspondence Audit

The IRS notifies you by mail that you are under audit and explains the reasons behind the examination. You will be requested to send them specific documents to support the information you included in your tax return. The usual grounds for this type of audit are brokered transactions like stock deals or real estate matters.

Office Audit

If your notice is for an office audit, you will be scheduled for a meeting with a tax auditor at the local IRS office. You will also be asked to bring along certain documents to substantiate your tax return. At the meeting, the auditor will examine your tax return and review your documents while interviewing you on the notable items in your return.

If you are not able to answer all the auditor's questions during an office audit, you may be scheduled for a second meeting. It is to your advantage if you seek the advice of a certified public accountant or tax attorney before attending the meeting. That way, you will be briefed on what to expect and how to respond satisfactorily to any questions that might be raised.

Field Audit

With a field audit, the IRS agent personally visits you at home or at work to perform the audit. It is usually the big businesses and individuals earning six figures or more that are audited in this manner. If you are up for a field audit, ask a tax professional to be around during the audit to represent you and facilitate the whole process.