What is a tax audit?

September, 02 2022 by Charla Suaste

Most of us are familiar with the words “tax audit” - but when it gets down to it, do we actually know what a tax audit is, why they exist, and what we can do to prepare for one? Well, today, we’re here to briefly answer some of those questions!

 

What is a tax audit?

By the IRS definition, a tax audit is “a review/examination of an organization's or individual's accounts and financial information to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct.”

What does this mean in layman’s terms? Basically, the goal of an IRS audit is to examine the returns of select taxpayers to make sure they filed their income tax returns correctly. The examination will review whether the correct tax was determined based on the taxpayer’s filing status, income, deductions, credits, etc.

Typically, the IRS will notify the taxpayer that their return is being examined by sending a letter via mail. These letters outline:

• the tax year,
• the items in question,
• the amount owed to the IRS or refund due to the taxpayer,
• the documentation needed to satisfy the IRS’ inquiry, and
• the deadline by which the taxpayer must respond.

The taxpayer must then decide if they would like to respond by submitting the appropriate documentation to defend the claims made on their tax return or pay any additional tax that may be owed. If the taxpayer decides to respond, it is important that copies of any documentation are submitted. Once the documents are submitted, the waiting game begins. Due to the backlog the IRS is facing as a result of the recent pandemic, taxpayers can expect to wait anywhere between weeks to months to receive a response.

 

Why do tax audits exist? Why must taxpayers go through this process?

While going through a tax audit is never pleasant – and most of us would do anything to avoid one – there are many reasons this process is in place. One of the primary reasons is the tax gap. Let me explain.

Every year, the IRS expects to collect a certain amount of taxes from taxpayers across the country. However, the gap between what is owed by taxpayers versus what is actually paid by taxpayers is enormous. This difference is known as the “tax gap.” The average tax gap falls around $600 billion every year – and, according to the Treasury Department, a $600 billion yearly tax gap will produce nearly $7 trillion in lost tax revenue during the next decade.

While most taxpayers have the best of intentions when filing, some may fail to make the appropriate claims on their tax return. This could be anything from forgetting to include income to wrongfully claiming dependents or taking deductions they are not qualified to take. These errors, even when they are made unintentionally, may mean taxpayers are paying less than their fair share of tax. So, IRS audits are, in part, an attempt to close the tax gap.
 

What can you do to prepare for or prevent a tax audit?

Great question! For starters, there are several important things you can do.

1. Check (and then double-check) the numbers and items on your return before you file. A simple misstep on the keyboard could result in a wrongly placed decimal point or an extra 0 onto a particular line item. Even seemingly small mistakes could incorrectly alter the results of the tax you rightfully owe.
2. Make sure the numbers you are claiming on your tax return are backed up by documentation. While making guesstimates or rounding income, deduction amounts, or mileage might make things easier at the time of filing, it will make things a whole lot more complicated if the IRS comes knocking and wants to see receipts or logs with detailed dates, times, and amounts.
3. Keep your documentation organized and in a safe place. If or when the IRS sends you an audit or other notice, you should be able to easily access the necessary documentation to prove the items claimed on your return.
4. Purchase a membership with TaxAudit. This is a no-brainer if you don’t want to go through the hassle of dealing with the IRS yourself! If you have a membership and receive a notice from the IRS or state, you can call us, and we will take it from there. We will start by analyzing your notice and tax return to determine what the next steps in your case should be. Your tax professional will work with you to come up with a strategy and then correspond with the IRS on your behalf. This includes submitting the proper documentation as well as handling scheduled phone calls and meetings throughout the duration of your case. Our Tax Professionals aim to ensure your case has a fair outcome and that you pay no more tax than what you rightfully owe.

So, instead of having to determine whether the notice you received is correct, sit on the phone with the IRS, etc., let us do it for you! We have been representing taxpayers across the country to the IRS for over 30 years. We are truly the best in the business and are always standing by, ready to help. Even if you never receive an audit notice, you have peace of mind knowing that you have audit representation experts on your side.

If you would like more information on what our memberships entail or are ready to get started, click here or contact our awesome Customer Service Team at 800.922.8348.