What Happens During a Personal Tax Audit?
First, it's important to understand what an audit is. An audit is an examination of a taxpayer's accounts and financial information to verify that everything is accurate and follows the tax laws. The IRS selects taxpayers for audit for a variety of reasons, including discrepancies in reported income, high deductions, and randomly selected returns.
If you're selected for an audit, the first step is to receive a notification letter from the IRS. This letter will provide information about why you're being audited, what documents you need to provide, and what date your audit is scheduled for. It's important to respond to this letter promptly, and gather all of the necessary documents in advance of your scheduled date.
During the audit, an auditor from the IRS will review your tax return and supporting documentation to ensure that everything is accurate and in compliance with the tax laws. This process can be conducted either through an in-person interview, through the mail, or through a combination of both. The type of audit you receive will depend on the complexity of your return, the type of issues being examined, and the preference of the auditor.
During an in-person audit, the auditor will ask you questions about your returns and documents to verify that your return was accurate. They may ask detailed questions about your income, expenses, deductions, and credits. You may also be asked to provide additional documentation to clarify or prove certain deductions or credits.
If you're undergoing a mail audit, the IRS will provide a list of specific items that they need you to provide. This may include copies of receipts or bank statements to verify specific deductions or credits claimed on your tax return.
Regardless of the type of audit, it's important to be honest and accurate in your responses. If a mistake was made on your tax return, it's best to be upfront and honest about it. The IRS would rather work with taxpayers to resolve any issues instead of pursuing legal action or penalties.
It's also important to be organized during an audit. Keep all of your financial records in one place, and make sure everything is labeled and easy to find. This will help you respond quickly and accurately to any questions the IRS may ask.
If the audit is completed and the IRS finds errors in your return, you will receive a notice of deficiency. This notice will explain what the IRS believes you owe, and what penalties and interest will be assessed. You will have the opportunity to dispute the findings during an administrative appeal, or in tax court.
In summary, a personal tax audit can be a stressful experience, but it's important to remember that the purpose is to verify that your return is accurate and in compliance with the tax laws. If you're ever selected for an audit, respond promptly to the IRS's notification letter, gather all required documentation, and be honest and organized throughout the process. With these steps, you can make the audit process as smooth and painless as possible.