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What is a Tax Audit?

A tax audit is an investigation into the background of tax returns submitted by an individual or a business.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 27 September 2014
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A tax audit is an investigation into the background of tax returns submitted by an individual or business to a tax agency. The idea of a tax audit normally conjures up feelings of anxiety even in persons who believe their tax documents are perfectly in order. While it is true that a tax audit may be called due to some perceived irregularity in one or more returns, it is also true that an audit may be done simply as part of a random sampling.

Most governments around the world include an agency that is charged with overseeing the process of tax collection from individuals and companies that reside within the jurisdiction. For the most part, the agency focuses on defining the processes involved with calculating and paying taxes. However, most tax agencies also review tax returns routinely as part of the process of correcting minor errors that may be present on any given return.

As part of the review process, tax agencies may use a policy of randomly selecting a few returns for auditing. When this is the case, there are normally not any punitive measures involved. The taxpayer simply brings along copies of the filed returns for the period cited, along with support documentation, and meets with a representative of the tax agency. If all deductions and earnings can be supported with documentation, the matter is considered complete.

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However, audits may also be conducted if the tax agency finds reason to believe deductions are not allowable or if there was a deliberate attempt to hide earned income. When this is the case, the government will often call for a tax audit to clear up and discrepancies. If the taxpayer can provide proof that the initial return was complete and correct, then all is well. If the tax agency finds that a deduction is not allowed, the return is recalculated and interest penalties may apply.

While a tax audit is normally considered routine, it has gained a reputation of being an extremely nerve wracking process for the taxpayer. However, many government tax agencies attempt to make the process of the tax audit as comfortable as possible for all parties concerned.

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ashybadashy
Post 2

@bobcat60, keep absolutely everything for at least 5 years. Any piece of paper you got numbers from for your tax return needs to be kept. I have a separate folder for each of the past five years. In each folder I have a complete copy of each tax return as well as any back up information that may be needed. Even if you file online, I would keep copies of everything for at least five years. Beyond five years, I just shred them very well!

bobcat60
Post 1

So does anyone have any tips on how to be prepared in case your one of the ones pulled for a random audit and you do your own taxes?

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