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Understanding the 3 main types of tax audits

On Behalf of | Nov 9, 2023 | Blog, Tax Debt |

Tax audits are a source of concern for many individuals and businesses. While the IRS only audits a small number of individuals and businesses, audits have the potential to lead to financial penalties and legal consequences.

Understanding the main types of tax audits is important for anyone navigating the complex realm of taxation. It also helps those facing a looming audit develop a better understanding of what to expect.

Correspondence audits

Correspondence audits are the least intrusive and most common type of tax audit. These audits take place through written communications, with the IRS requesting specific documents or information to clarify discrepancies or errors on a tax return. Taxpayers may receive a letter from the IRS asking for substantiating documents, such as receipts or records, to support claimed deductions or income.

Office audits

In an office audit, taxpayers must meet with an IRS auditor at a local IRS office or, in some cases, through a virtual platform. These audits are more complex and generally focus on specific aspects of a tax return, such as deductions, credits or business expenses. Taxpayers may have to provide detailed records and explanations during the meeting. Preparing for an office audit involves thoroughly reviewing financial documents and developing an understanding of the specific issues the IRS auditor wishes to address.

Field audits

Field audits are the most comprehensive and invasive type of tax audit. In this scenario, IRS auditors visit the taxpayer’s home, business or accountant’s office to conduct a thorough examination of financial records, assets and income sources. Field audits typically become necessary in complex cases involving substantial financial transactions, such as businesses, self-employed individuals or high-income earners.

While the threat of a tax audit may feel daunting, U.S. News and World Reports notes that only 0.4% of taxpayers ever become the subject of an audit. Being prepared and informed can help individuals navigate these potentially stressful situations more successfully.