IRS Audit Basics
The Internal Revenue Service (IRS) may review a business's or individual's financial information to confirm the accuracy of the amount of tax reported. This examination process is known as an IRS audit. Businesses and individuals may be chosen for audits by the IRS for several reasons and does not always indicate that there were errors made on previous tax reports or returns.
First, the IRS may choose people to audit by random selection and computer screening. Statistical formulas may be entered into the IRS's computer database to select entities to audit.
Second, the information within people's or organization's documents does not correspond with the information reported on tax reports or returns. An audit in these cases is conducted to reveal the reason for the inconsistency.
Third, returns that may be related to other taxpayers who are undergoing an audit may be selected. Common examples are business partners or investors.
The IRS may conduct audits by mail or live interview. The interview may occur at an IRS office or the taxpayer's home, business or accountant's office. Prior to the interview, the IRS will specify in writing which specific records are necessary to bring to the audit. The law requires taxpayers to keep records used to prepare tax returns and these should generally be retained for three years after the date a return is filed. In addition, the IRS allows electronic records as long as they meet specified formats.
The IRS may propose changes to tax returns or require no changes after an audit. Therefore, IRS audits do not necessarily need to be feared.
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