Tax Audit
An examination of tax returns by the IRS to verify accuracy.
A tax audit is the IRS's formal review of a taxpayer's return and supporting documentation to verify that income, deductions, and credits are reported correctly. Audits can be conducted by mail (correspondence audit), at an IRS office, or at the taxpayer's place of business. Most audits are triggered by statistical anomalies or random selection.
Example
A small business claiming $40,000 in vehicle expenses receives a correspondence audit from the IRS requesting mileage logs and receipts to substantiate the deduction.
Why It Matters for Your Business
Maintaining organized records and reasonable deductions significantly reduces your audit risk and ensures a smooth process if you are selected.
Practical Tips
- •Keep receipts and documentation for every deduction for at least three years.
- •Use a tax professional to respond to audit notices rather than handling them alone.
Related Terms
More Taxes Terms
Adjusted Gross Income
Gross income minus specific deductions like retirement contributions.
Capital Gains
Profit from selling an asset for more than its purchase price.
Capital Loss
Loss from selling an asset for less than its purchase price.
Tax Deduction
An expense that reduces taxable income.
Estimated Taxes
Quarterly tax payments made by self-employed individuals and businesses.
Related Financial Guides & Resources
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