The Internal Revenue Service requires taxpayers, businesses and organizations to file income tax returns each year. When the IRS receives your return, it will compare it with similar tax returns, first via a computer system, and then via personal review if the computer flags the return. If the IRS discovers too many discrepancies, it may conduct an inquiry, which is also called an audit, during which an agent will review your tax returns and your financial records to make sure everything lines up.
What is an IRS Audit?
What does the IRS mean by inquiry? An IRS inquiry, or audit, occurs when the IRS conducts an in-depth examination of a business or individual's financial records, accounts and deductions. The purpose of this process is to determine whether the business or individual is accurately reporting information on tax returns and whether the business or individual paid the correct amount in taxes. An audit may uncover unreported income, underreported income or inflated deductions, all of which can occur by mistake or by design.
The IRS Audit Process
Initially, all tax returns are reviewed by a computer system, and any mathematical discrepancies are flagged. If a return is flagged, a person will review the return, and if the discrepancies are significant enough, they may trigger an audit. IRS audits may also be conducted at random.
Should the IRS select your return for an inquiry, you will receive notification in the mail. If you receive an IRS letter, read it carefully and do everything it tells you to do, because failure to comply with requests may result in difficulty down the road. The IRS may conduct the inquiry by mail, or a representative may meet with you in person to review your financial records. If the IRS opts to conduct an in-person interview, the meeting will occur at your home, your business, your accountant's office or an IRS office. The IRS will inform you of the documents you must present during the interview.
Possible Outcomes of an IRS Audit
If you are able to show that your return is accurate and that you have paid all owed taxes, there will be no change to your return and the IRS will take no further action. However, if the IRS determines that portions of your return are inaccurate, they will require you to file an amended return reflecting the books and records you have available. If you amend your return, you may end up owing more money than you did previously, and you may suffer monetary penalties (occasionally, you might even end up with a refund). You do have the right to dispute the auditor's determination if you believe your return is accurate. If you are audited, having an accountant to review your books ahead of time can be helpful.
Some audits result in criminal charges, because the IRS may find evidence that the taxpayer knowingly provided false information on a tax return to avoid paying higher taxes. Tax evasion is a federal crime, and for deceitful individuals and businesses, an audit can lead to court, fines and even prison.
Avoiding IRS Audit Problems
If your return is flagged for a discrepancy, you may be audited. One way to avoid an IRS inquiry is to report all income accurately and in the appropriate sections of your tax return, and only claim the deductions for which you qualify. Use the services of a CPA to prepare your tax returns if you have a complicated financial situation. If the IRS does conduct an audit, gather all appropriate documentation and review it prior to the inquiry with your accountant. You have the right to represent yourself during the interview, but you can also bring an accountant or tax lawyer to assist you. If you present everything truthfully and have documentary support for all your income and expenses, the audit should go smoothly.