A tax audit is a process which analyzes the activities of a business or individual tax return initiated by the IRS. It ensures that all reported data is correct and that your incomes and expenses are accurate. When you have entered something which is out of the ordinary, the IRS overviews the tax return.
Triggers for a Tax Audit
There are a variety of reasons for raising the attention of the IRS towards you. Some of the triggers are given below:
- Issues can rise when your income is not fully reported in the Discriminant Information Function.
- Business operating losses are unusual or unordinary.
- Having money in a foreign bank account.
- Having money is more than your income.
- Small businesses generate a lot of cash receipts from smaller transactions.
- Other reasons might include errors in return, large charitable deductions, high and lavish pay on meals and entertainment, and a noticeable drop in the reported income from one year to the next. Download this to gain more knowledge.
Objectives of the Tax Audit
In this section, we will highlight some of the objectives of the tax audit:
- Gives important information relating to tax depreciation and tax deductions etc.
- Facilitate the administration of tax laws through a proper and detailed presentation of accounts before the authorities.
- Ensures the proper maintenance of account books and their correctness.
- Reflecting accurately the income of taxpayers and their deductions.
Need and Importance of Tax Audit
The importance of tax audit could be summarized as:
· Detecting errors:
It helps to detect errors if any by allowing taxpayers to correct them before it results in penalties or fines.
· Improves record-keeping:
It helps taxpayers to improve their record-keeping by reducing errors.
· Compliance with tax laws:
It helps to ensure that businesses, individuals, and organizations are following all the tax laws of the nation and paying taxes on time.
· Identifies tax savings:
It also helps to identify tax-saving opportunities that taxpayers, businesses, or individuals might have missed. It might also lead to a lower tax bill.
· Malfunctioning and Frauds:
It keeps a check on all the malfunctioning and frauds which happen while filing Income Tax returns.
It is necessary to note that tax audits are an integral part of the tax system and administration and this can be conducted by various agencies. It is nothing to be scared of! A taxpayer needs to cooperate with government agencies in the utility bill audit process.
