When the IRS notifies Pennsylvania residents that their taxes will get audited, it can cause a nerve-racking feeling. However, understanding the tax audit process can make it seem less scary for many people. There are some things that people could benefit from knowing if they receive an audit notice from the IRS.
Defining a tax audit
When the IRS or other government agencies audit an individual or organization, they examine the tax return of that individual or organization. The purpose is to ensure the accuracy of all provided financial information.
While the IRS is commonly associated with tax audits, State Departments of Taxation can also conduct audits, payroll tax departments and other government agencies.
A tax audit can range from a simple request for additional documentation or information to an in-depth investigation of an individual’s or organization’s records. An audit does not necessarily imply that the IRS suspects any tax issues. For individuals who do not have unusual tax items, significant wealth or extraordinary deductions, a tax audit is likely to involve answering a specific question.
Triggers for tax audits
The IRS may initiate an audit based on specific tax issues. For instance, households earning over $400,000 yearly have a higher chance of being audited. When deciding whether to audit, the IRS utilizes a computerized scoring system called the Discriminant Information Function (DIF) to analyze and compare tax data and deductions. Certain factors raise red flags, such as exceptionally high charitable deductions, foreign bank accounts, lavish business expenses and unusual business operating losses.
Although audits can happen to anyone, most individuals do not typically encounter circumstances that trigger an audit. Those who undergo an audit can usually resolve the matter by providing the requested documentation or information.
