An IRS audit is a review or examination of a taxpayer’s financial records and tax return to ensure that all income, deductions, and credits have been reported accurately and that the taxpayer has complied with federal tax laws. The audit process can be triggered randomly, or it can result from red flags in the taxpayer’s return, such as discrepancies, high deductions, or underreported income.
There are three types of IRS audits:
- Correspondence audit: Conducted by mail, where the IRS requests documentation to verify specific items on the tax return.
- Office audit: The taxpayer is asked to visit a local IRS office with records and receipts for review.
- Field audit: An IRS agent visits the taxpayer’s home, business, or accountant’s office to conduct a more in-depth examination.
Common reasons for an audit include:
- Large, unusual deductions or claims that do not align with the taxpayer’s income level.
- Mismatched income reporting compared to third-party records (e.g., W-2s or 1099s).
- Inconsistent filings, such as failure to report capital gains, gambling winnings, or foreign assets.
If selected for an audit, taxpayers are required to provide supporting documentation, such as receipts, bank statements, and financial records, to substantiate the information reported on their tax return. The outcome of the audit may result in no change, additional tax owed, or in some cases, a refund if an overpayment is discovered.
Taxpayers should work with a tax professional to prepare for an audit and ensure that their financial records are accurate and complete. Proper documentation and transparency can help avoid penalties or further legal action by the IRS.