For many Americans, just the thought of filing taxes can induce anxiety, especially as many see taxation laws and the process of filing complicated. This kind of trouble stems from a lack of knowledge and experience with taxes.
Whether you have been diligent with your taxes or not, there may come a time when you will need to deal with the Internal Revenue Service (IRS) in a tax audit. Preparation is key when it comes to addressing this event.
The best way to prepare is to know more about auditing, what it means, and why you could be subjected to it. This guide can help you understand IRS tax audits. Read on to learn more about this important process.
What Is an IRS Tax Audit?
The IRS defines audits as an evaluation of an individual’s or organization’s accounts and finances. This process looks into the financial information reported by the subject. The main goal of this review is to see whether the reports are correct and in accordance with tax laws.
In the U.S., there are several types of audits. One of them is a correspondence audit, which is a process of using correspondence to issue notices or requests from the IRS. This can come in the form of simple letters and audit letters.
An office audit is a process of interviewing a taxpayer regarding specific items in their report, while a field audit is when an IRS agent visits the taxpayer’s home, office, or accountant to review their records.
Lastly, a line-by-line audit is the most feared among all the types. As the name suggests, it takes a look at every entry shown in your returns. If you are subjected to this, it does not mean that you have issues, as taxpayers are randomly selected.
As mentioned, there are types of audits that are conducted because a taxpayer is randomly selected by the IRS. This is done under the National Research Program (NRP) to gather data for targeted audits in the future.
However, keep in mind that while you may be randomly selected for a tax audit, which means that you were not selected because of issues, the audit might find issues in your returns. This can result in you paying additional taxes, penalties, and interest.
Your Tax Behavior
There are a lot of behaviors that can result in an audit. The Bank Secrecy Act means that your financial institution will alert the IRS if you conduct large transactions or those over $10,000.
If you happen to deposit or spend such an amount, you may be chosen for an audit. You can also be subject to auditing if you claim a lot of deductions, earn too much or too little, or work from home. Investment income and overseas assets are also valid reasons.
Issues with Other Taxpayers
Lastly, any issues with other taxpayers lead the IRS to audit you. If you have a business partner and they are selected for an audit, then you may be audited, as well, because you have the same stream of income.
Investors under scrutiny by the IRS can also lead to the audit of businesses or individuals they invested in. So, if other taxpayers connected to you are under review, do not be surprised if you are contacted by the IRS, too.
The Bottom Line
Getting selected for a tax audit does not always mean that you have done something wrong with your taxes. Now that you know how the IRS picks taxpayers for auditing, you can save yourself the stress of worrying about this process.