Hearing the words "tax audit" often brings fear to every taxpayer, especially if you're on the receiving end of a dreaded audit notice from the IRS. But taking the time to understand what it is can make it less scary. We're here to help you so you don't break out in a sweat. If you need more information on this, you can always get tax services in Kearny, NJ for a more detailed discussion on how tax audits work. For now, read through our blog so you can gain a better understanding of what it is.
While some audits can be dreadful, there are some that are actually no big deal. So if you receive a notice from the IRS, take a deep breath and first identify the type of tax audit that is being conducted. By doing that, you will have a better sense of what's involved and what you need to do. Better yet, contact Nicholas Coco, CPA an accomplished accountant for tax services in Kearny, NJ so you can make sure you're doing the right thing.
Tax audits are when the IRS examines tax return information to check whether all reported data is correct. If there is incorrect or incomplete data on tax returns, it can trigger an audit.
A major concern for every taxpayer is the possibility of getting audited. And while the chances of it happening to you are slim, there are some factors that may increase your chances of being audited.
What Triggers an Audit?
There are a variety of potential triggers that cause tax returns to fall under intense scrutiny. To help make things easier for the IRS, they use the Discriminant Information Function System, a computer scoring system that analyzes tax deductions and compares taxpayer data. The results are often used as the basis for initiating an audit.
- Tax return that is not fully reported
- Abnormal business operating losses
- A sharp drop in reported income from year to year
- Errors and inconsistencies in the tax return
- Omissions in reports
- Having money in a foreign bank account
- Lavish business expense deductions for entertainment or meals
- Cash-intensive businesses that generate a lot of cash receipts from smaller transactions
- Charitable deductions that are exceptionally large, except when receipts and documentation are shown to back up the donation.
- Income that is more than $500,000 to over $1 million in a year
4 Types of Tax Audit
Correspondence Audits are done through written correspondence. It can simply be a letter sent to you by the IRS stating that you owe the government some money. It can also be an audit letter asking for documents to support a certain deduction taken on your return.
Office Audits are when the IRS interview you in person to ask about specific items stated in your tax return.
Field Audits are when IRS agents visit your home, your accountant's office, or your place of business (if you are the business owner). This type of audit is rare and if you are in this kind of situation, it would be better to have a tax pro to assist you.
Line-by-Line Audits are the most dreaded audits because taxpayers chosen at random will have their return examined line by line. The good news is that this type of audit is only done rarely.
If you’d like to know more about tax audits or if you are being audited and you need help, get in touch with Nicholas J. Coco. He is a Certified Public Accountant offering comprehensive accounting services in Kearny, NJ. Call today for more information.