Once someone begins working or receiving passive income from investments, they have to start reporting their income to the government and paying income taxes. Filing an annual income tax return is necessary for anyone with significant income even if they are still a minor living at home with their parents. People continue filing annual tax returns throughout their working lives and sometimes well into their retirement.
The average taxpayer tries to carefully walk the fine line between tax minimization and criminal tax evasion. There are many ways for people to reduce what taxes they have to pay on their income. From exemptions and credits to deductions, there are various federal income tax rules that can reduce someone’s final tax bill.
Occasionally, the Internal Revenue Service (IRS) may begin to suspect that someone has not honestly reported their income were fully paid their taxes. The agency may then decide to audit that person. What does an audit usually involve?
The IRS wants to look at records carefully
An audit is essentially an in-depth review of someone’s most recent tax return and possibly several prior years of financial records as well. Depending on the situation, the person facing the audit might need to send certain records to the IRS.
Sometimes, such as when the IRS audits a small business owner, an IRS agent may come to an outside location as part of the audit process. Other times, the taxpayer goes to an IRS facility for an in-person audit. In any of these scenarios, the IRS typically reviews financial records to determine if someone violated the law or underpaid their taxes.
Audits don’t always lead to penalties
Sometimes, audits put people at risk of prosecution if the IRS determines they evaded their taxes or committed fraud on a return. The IRS can recommend the prosecution of those embroiled in a tax controversy. Other times, the IRS may simply determine what someone failed to pay, calculate interest, add fees and then demand payment. Audits often mean that people must negotiate a payment plan or make an offer in compromise to submit a lump-sum payment that is less than their current tax debt.
Those who have just received notice of an upcoming audit may worry about the possibility of prosecution and financial losses. Thankfully, seeking legal guidance during an IRS audit can often make a major difference for a taxpayer in this situation.