Many taxpayers may experience anxiety as a result of tax audits. However, you may go through an audit more quickly if you know what happens during a tax audit.
Our taxation experts have outlined the reasons for audits, what to anticipate from them, and the appropriate responses you should prepare.
What is a Tax Audit, and Why Does It Happen?
The IRS audits tax returns to ensure their accuracy. Their computer system analyzes the results, flagging anomalies or inconsistencies.
For example, a return may include an itemized deduction that is substantially greater than typical or a profit ratio that is noticeably lower than the average for firms in the same industry. A discrepancy like this may lead to an audit.
What Happens During a Tax Audit?
There are three main types of audit:
- Correspondence audit
- Office audit
- Field audit
The IRS will send you a letter explaining the specifics of the audit and what information they want from you.
The following actions can help you get ready for your audit:
Collect the Documents Requested
Arrange your files according to categories. Keep invoices and evidence of payment close at hand for every cost claimed.
Fulfill Deadlines
To prevent delays or fines, reply to the IRS within the allotted period.
Read about the IRS & state audit representation.
Only Respond to Specific Questions
Avoid sending unsolicited material that can expand the audit’s purview. Follow the auditor’s instructions while responding to queries.
Seek Assistance If Needed
We recommend you speak with our Certified Public Accountant (CPA) or Enrolled Agent (EA), particularly for intricate audits. They can advocate for you and help you navigate the procedure.
What Happens After the Audit?
The IRS will evaluate the papers after you submit them. Three things may happen:
The Audit Closes with No Changes
The IRS may terminate the audit without making any changes to your tax return if your records are in order and corroborate the information on your return.
The IRS Requests More Information
Before concluding the audit, the IRS occasionally may require further details or explanation. Usually, they will contact you to ask for more proof.
Proposed Changes to Your Tax Return
If the audit reveals inconsistencies, the IRS suggests modifying your tax return. Penalties or extra taxes might result.
Sign the letter indicating your agreement to the suggested adjustments and make any additional tax payments due. However, you can challenge the judgment if you disagree with the conclusions. You can submit your case for consideration to an impartial IRS authority through the IRS appeals procedure.
The Bottom Line
The stress of knowing what happens during a tax audit can be considerably decreased. Stay aware of the audit procedure and maintain well-organized documentation. Keep your composure, assemble your supporting documents, and get back to the IRS by the deadline.
Feel free to ask a tax expert for assistance if you need it.
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