Audit
Definition
An audit, in the context of taxes, is a formal examination of an individual’s or organization’s accounts or financial situation to verify that financial records are accurate and that taxes have been paid correctly.
Detailed Explanation
Tax audits are conducted by governmental agencies such as the Internal Revenue Service (IRS) in the United States to ensure compliance with tax laws and to correct discrepancies between what a taxpayer reports and what is actually owed. During an audit, tax returns are scrutinized to look for inaccuracies, whether unintentional or fraudulent. Audits can be conducted via correspondence (mail), in an IRS office (office audit), or in a more extensive field audit at the taxpayer’s home, place of business, or accountant’s office.
The process may involve reviewing financial statements and accounting books, and providing documentation such as receipts, bills, and other records that support the reported income and deductions. The outcome of an audit can result in no change, which means everything was found in order, or it can lead to a change that may require the taxpayer to pay additional taxes, penalties, or interest. In some cases, it can result in a tax refund if the audit finds overpayment.
Example
The IRS selected Jane’s tax return for an audit because of unusually high deductions compared to her income level. She was required to present documentation proving her charitable donations and medical expenses. After reviewing the provided documents, the IRS concluded that all deductions were valid and ended the audit with no change to her tax return.
Key Articles Related To Audits
Related Terms
IRS (Internal Revenue Service): The U.S. government agency responsible for tax collection and tax law enforcement.
Compliance: Adherence to laws and regulations governing reporting and payment of taxes.
Tax Return: A form filed with a tax authority that reports income, expenses, and other relevant financial information.
Tax Deduction: An expense that can be subtracted from gross income to reduce taxable income.
FAQs
How are individuals or businesses selected for an audit?
Selection for an audit can be random or it can be triggered by discrepancies such as failure to report all income, excessive deductions, or mismatched documents filed by employers or banks.
What should I do if I am selected for an audit?
If selected for an audit, you should gather all relevant financial documents, possibly consult with a tax professional, and respond to all IRS inquiries promptly and truthfully.
Can an audit result in criminal charges?
While most tax audits are civil, criminal charges can result if an audit uncovers evidence of intentional tax evasion or fraud.
Editor: Colin Graves