To keep everyone honest and ensure tax laws are observed, the Internal Revenue Service (IRS) conducts income tax return audits. A tax audit is a review/examination of your income tax returns a bit closer than usual. This is done in order to ensure that your income and deductions are accurate and to prevent persons from breaking tax laws.
There are three types of Tax Audits:
In this type of audit, the IRS sends you a letter which requests proof of all your income activity. There is no personal contact and less scrutiny involved.
This takes place in the actual IRS office. Here, you will be asked questions and told to bring records such as bank statements and receipts. You are also free to bring your lawyer or accountant to represent you.
This type of audit is similar to an Office audit however it takes place in your home or business and is very thorough. But what are the chances of this happening to you?
According to the IRS the chances of this happening are less than 1 in every 100 person. This is around 0.84% of individuals. The selection of persons to be audited is done randomly by a computer. The probability of being audited increases if your reported income exceeds Two Hundred Thousand US Dollars (US$200,000) or if you have reported no income reported. Red flags are also raised when one makes a charity donation greater than their reported income, fails to report all sources of income or makes a huge, early withdrawal from retirement fund.
Tax audits, although random, can be avoided by the common man. You should start by keeping good records. Make copies of all transactions and store in a secure place. You could also avoid excessive spending especially on luxuries such as vacations, cars, etc. Most importantly, check and double check income tax returns. If necessary, seek tax preparation services to avoid errors when filing for income tax returns.
The chances of having your income tax return audited are slim to none. However, should this happen, it may be beneficial in a case where you find yourself paying more taxes than you ought to. So, don’t fear audits. Embrace them. Ensure your business is in order and you’ll have nothing to worry about.