What is a tax audit?
A tax audit is an examination of a taxpayer's financial information by the Internal Revenue Service (IRS) to ensure that the information reported on tax returns is accurate and complies with tax laws. The IRS may conduct an audit by mail, in-person at an IRS office, or at the taxpayer's home, place of business, or accountant's office.
During an audit, the IRS may request documentation to support the information reported on tax returns, such as receipts, invoices, and bank statements. The IRS may also ask questions about specific items on the tax return or request additional information about the taxpayer's financial situation.
What triggers a tax audit?
There are several factors that may trigger a tax audit, including:
- Discrepancies or errors on tax returns
- High income or large deductions
- Self-employment or business income
- Claiming a large number of dependents
- International transactions or foreign bank accounts
- Previous audit history
What happens if you are audited?
If you are audited, the IRS will notify you by mail or phone. The notification will include information about the items being audited and the documentation needed to support those items. You will have the opportunity to provide the requested documentation and respond to any questions from the IRS.
After the audit is complete, the IRS will either accept the tax return as filed or propose changes to the return. If changes are proposed, the taxpayer can either agree to the changes or appeal the decision through the IRS appeals process.
How can you avoid a tax audit?
While there is no guaranteed way to avoid a tax audit, there are steps you can take to reduce the likelihood of being audited:
- File accurate and complete tax returns
- Keep detailed and organized records of all financial transactions
- Avoid claiming excessive deductions or credits
- Report all income, including income from side jobs or freelance work
- Be honest and transparent with the IRS
Nick Simpson
Founder @ WorkMade
I started working for myself at 9. My first tax bill showed up at 14. I didn’t understand it, and nobody around me could really explain it. If you’ve been there, you get it. Twenty years later, after creative directing for brands in New York and buying and selling a few companies, I kept seeing the same thing: smart, talented people losing money to a system that wasn’t built for how they work. That’s why I built WorkMade. Not to make taxes “easier to understand” but to make them disappear into the background, so you can get on with your life.