Income tax audits can seem intimidating. They involve a thorough review of financial information and tax returns by a tax authority to ensure that all the reported income, expenses and credits are accurate and comply with tax laws. It’s a topic that many people dread, but understanding what an audit entails can dispel much of the fear and uncertainty.
Knowing what triggers an audit, how the process works and how to respond can significantly reduce the stress associated with an audit. Consider these key points every individual should understand about income tax audits.
Triggers for an audit: Knowing what catches the tax authority’s eye
Certain factors can trigger an audit, including inconsistencies between your tax return and the data the tax authority has received, unusually high deductions relative to your income, large cash transactions or random selection. Keeping meticulous records and being honest and accurate in your tax reporting can reduce the likelihood of an audit.
Types of audits: Correspondence, office, and field audits
There are three types of audits: correspondence, office and field audits. Correspondence audits are conducted through mail and are the most common. Office audits involve visiting the tax authority’s office, while field audits are when an auditor visits your home or business.
Responding to an audit notice: Be prompt and prepared
If you receive a notice of audit, it’s essential to respond promptly. Gather all relevant documents, such as bank statements, receipts and logs supporting your tax return information. Consulting a tax professional can also be beneficial.
Rights during an audit: You’re not powerless
During an audit, you have certain rights, including the right to professional and courteous treatment by the tax auditor, the right to appeal the audit findings and in some cases, the right to legal representation.
After the audit: Agreement, disagreement, and appeal
Once the audit is complete, you must sign the examination report or a similar document if you agree with the findings. If you disagree, you can request a conference with a manager, mediation or file an appeal if your request is not resolved at the managerial level.
While income tax audits may seem daunting, they don’t have to be a cause for panic. With that said, seeking legal guidance can help to better ensure that your rights are protected and that your stress level related to the situation remains as low as possible under the circumstances.