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What is an Income Tax Audit?

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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 06 December 2016
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An income tax audit is an inspection conducted by a government representative to confirm that someone's taxes were prepared correctly. Tax audits are very intimidating for most taxpayers, and the important thing to remember about audit notices is that they are not accusations, and that taxpayers are not being required to prove that they are not guilty of something when they are audited. Audits are usually performed on an entirely random basis, with taxpayers being selected by a computer.

In an income tax audit, the taxpayer is required to show documentation and support for every aspect of his or her tax return. For example, if someone claims itemized deductions, receipts for those deductions must be produced, in addition to justifications for why the taxpayer felt that those deductions were legitimate. In addition, taxpayers must open their accounting methods to inspection, and demonstrate that all of their income was in fact properly documented and claimed on the tax return.

Audits are usually performed because a taxpayer was randomly selected by a computer. Certain areas of tax returns are especially prone to errors, so a computer may weight people with things like high income, home offices, high levels of deductions, or repeated business losses for audits. Taxpayers may also be selected for auditing when they fail to pay their taxes, or when they request an installment plan to pay taxes.

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In a correspondence income tax audit, the taxpayer is sent a notice and asked to return documents by mail. Field audits occur when agents come to the taxpayer at home or in the office to discuss tax issues, while office audits require the taxpayer to show up in a government office with supporting documentation on a specific day or time. The agent assigned to the case will review the material and make a determination on the basis of that review.

Sometimes, someone's taxes are audited and everything appears to be in order, in which case no action is taken. In other instances, over or underpayment of taxes is detected, and the issue will need to be corrected. If the taxpayer engaged in activity which is fraudulent or illegal, he or she can face legal penalties in addition to fines.

Mistakes happen on everyone's taxes now and then, and as long as taxpayers can demonstrate that an error is a true accident or the result of an action taken in good faith, the government is usually satisfied with a correction and no other action. Taxpayers can make the audit process smoother by taking the time to fully prepare for an income tax audit so that all of the information is organized and available, and by being polite and helpful to the auditing agent. Consulting an accountant or income tax lawyer can be advisable if someone is preparing for an income tax audit.

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