An audit can refer to any kind of official inspection of financial statements—usually to make sure that numbers have been reported correctly.
Most often when people talk about audits they’re referring to tax audits. That’s when the IRS or a state tax agency asks you for more information about your finances, typically because they want to make sure that you’ve reported information correctly in your tax returns.
Audits are kind of like quality control checkpoints. For the most part, the government trusts people (and their accountants) to follow the rules and file their taxes accurately. But periodically, the IRS wants to double-check your records and your work.
Although audits sound scary, they’re not that common. Less than 1% of tax returns are selected for an audit each year.
The IRS might pick you randomly or because its computer caught a suspected error in your return. Audits can happen to anyone, but there are some factors that can increase your chances, including:
Most audits focus on a specific aspect of a return, such as income sources, deductions, or the cost basis of an asset you sold. However, some people are selected for a line-by-line audit, which looks at everything and can be a long process.
In addition to your most recent return, the IRS may also audit your past returns. It may go back further if its accountants believe you’ve made a substantial error although usually not more than six years.
But most audits are just a request for more information and are resolved with little effort. Plus, not all audits result in a hefty tax bill. Some taxpayers actually end up with a refund.
The IRS may conduct audits in person or by mail. In a so-called correspondence audit, the IRS will contact you by mail to request additional information. You can then respond by mail or fax with the requested documentation.
The IRS does in-person audits in two ways:
No matter the type of audit, the IRS will usually reach out by mail first before ever contacting you by phone or showing up at your doorstep.
Even though most people don’t get audited, there are a few things to keep in mind during tax season:
You can’t always avoid an audit, but you can minimize the likelihood that your return will catch the attention of the tax man by:
Audits help make sure everyone is paying their fair share in taxes and can help the authorities identify tax fraud. Audits are usually nothing to worry about as long as you’ve been honest in your filings. Many can be resolved with minimal fuss, and occasionally they can even result in an extra refund.