Tax Audit: Definition, Types, Examples

There are many types of audits that companies may go through. The most common of these include an external or statutory audit required by laws and regulations. Being a taxpayer, companies may also fall under tax audits. These audits also apply to individuals or any entity that may be considered a taxpayer. Tax audits differ from other types of audits.

What is a Tax Audit?

A tax audit involves the examination of a taxpayer’s tax returns by a tax regulatory body. Every country will have an organization that is responsible for overlooking its tax matter. For example, in the US, it is the Internal Revenue Services (IRS), and in the UK, it is the HM Revenues and Customs (HMRC). These bodies do not have a specific requirement for organizations to conduct tax audits.

Instead, they examine taxpayers’ tax returns and select taxpayers based on their criteria. Usually, it involves choosing taxpayers with unusual transactions or figures reported. In tax audits, the tax authority investigates a taxpayer’s tax returns more accurately. Through this process, it verifies the incomes and deductions reported in the tax return.

A tax audit allows tax authorities to determine whether taxpayers’ financial records and transactions on the tax returns are accurate. It also allows them to confirm that their returns reflect their actual income and deductions that they have claimed. The audit procedures performed in these audits differ from other audits, for example, external or internal audits. It also involves a special tax compliance audit report, which the auditors submit directly to the tax office.

What are the types of Tax Audits?

There are various types of tax audits that a tax authority may conduct. Usually, the complications of the audit will dictate which form of tax audit will occur. However, there are other criteria that tax authorities will also consider before choosing the type. Some of those types are as below.

Mail tax audit

Mail tax audits are the simplest forms of tax audits. With these audits, the complications are lower, resulting in lesser details required. Regardless of the tax audit type, taxpayers will receive a notice for the audit through the mail. However, not all of these audits fall under mail audits. Overall, mail tax audits involve requesting taxpayers for additional evidence to support their claims on their returns. Mail tax audits are also known as correspondence tax audits.

Office tax audits

Office tax audits involve questioning a taxpayer in the tax authority office. Usually, there is an audit officer who will investigate the taxpayer in person. The taxpayer will receive a notice in advance entailing the requirements for the audit and the supporting evidence they must bring. The taxpayer can also choose to get represented by advocates, for example, accountants or lawyers.

Field tax audits

Field tax audits are the broadest tax audits conducted by a tax authority. These audits involve an agent visiting and investigating a taxpayer. The taxpayer chooses the location for this audit, which usually includes their home or office. Field audits are more thorough and have higher requirements compared to the other types of tax audits.

Conclusion

Tax audits involve examining a taxpayer’s financial records and transactions for tax purposes. With these audits, the auditors confirm whether the tax returns reflect accurate information. There are several types of tax audits that taxpayers may go through. These include mail, office, and field tax audits. Usually, the complications of the process dictate under which type a taxpayer will fall.

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