You get a letter in the mail, a letter emblazoned with the gut-wrenching acronym, IRS. You say to yourself: "But I filed on time! I paid all my taxes!" That may be, but unfortunately, that doesn't mean you won't be audited.
Yes, it’s nerve-wracking. But income tax audits, like death and taxes themselves, are a fact of life in the United States. The Internal Revenue Service examined close to 1.4 million individual tax returns in 2007, about 1 percent of all individual tax returns [source: CNN]. Compare this to 1.29 million returns examined in 2006, and you see that the IRS is becoming increasingly serious about getting its money [source: Kristof].
An audit is frightening no matter what, but it doesn't have to be inscrutable. And it doesn’t always mean you will owe more money. There is, believe it or not, a method to the madness.
An income tax audit is an examination of a tax return. During an audit, an IRS examiner makes a line-by-line assessment of your tax return. If something doesn't add up correctly or the return contains something unusual, the examiner will point out the mistake or ask you to justify the unusual item. Depending on what the examiner finds, you may owe more tax, or you may be in the clear.
This article takes a look at the different types of audits -- office, field and correspondence. You’ll learn what to do if you get the dreaded audit notice. Finally, you’ll learn about the red flags that could attract the IRS examiners, and get some tips on how you can avoid investigation.
In case you do get that notice in the mail, how do you prepare for an audit? Get some answers on the next page.