The Internal Revenue Service (IRS) employs various methods to verify taxpayer compliance and ensure accurate tax payments. Two common procedures are tax audits and tax reviews, each differing in scope, intensity, and impact.
Background and History
Tax audits have long been a fundamental enforcement tool for the IRS. They involve a thorough examination of a taxpayer’s records to confirm reported income, deductions, and credits. In contrast, tax reviews—sometimes called correspondence examinations or account management reviews—are less formal checks that focus on particular aspects of a tax return, typically initiated by discrepancies or requests for additional information.
How Tax Audits Work
Tax audits are comprehensive examinations that can be conducted by mail or in person, with in-person audits being more detailed and less common. During an audit, the IRS may request extensive documentation such as bank statements, receipts, invoices, or detailed explanations for deductions and credits claimed. These audits can last from several weeks to months depending on the complexity of the case. When the IRS completes the audit, it may result in no changes, additional taxes owed, penalties, or sometimes refunds if overpayments are identified.
How Tax Reviews Work
Tax reviews typically start when the IRS sends a notice or letter asking for clarification or verification of certain information on your return, such as income figures or deduction claims. This process is usually handled through mail and rarely involves face-to-face meetings. The IRS reviews the documents you provide and, if everything aligns, the review closes without further action. Because the review is limited in scope, it usually resolves quicker than audits, often within a few weeks.
Real-World Examples
- Tax Audit: If you claim significant charitable deductions or report business losses, the IRS may audit your return to verify these claims by requesting supporting receipts, donation acknowledgments, or business tax documents.
- Tax Review: If your reported income does not match the information employers provided to the IRS, a review letter might request confirmation or correction of your W-2 income. Providing the right documentation typically closes the review.
Who Can Be Subject to Audits or Reviews?
Any taxpayer who files a return can be selected for either an audit or review. Audits are usually triggered by complex returns, random selection, or red flags detected by IRS algorithms. Reviews are more common for minor inconsistencies or missing paperwork and help the IRS maintain accurate records without resorting to a full audit.
Tips for Handling Tax Audits and Reviews
- For Audits: Maintain organized records for at least three years (as recommended by the IRS), respond promptly to IRS requests, and consider consulting a tax professional if the process feels complex.
- For Reviews: Don’t ignore IRS letters—provide clear, honest information quickly to resolve the matter efficiently.
Comparison Table
| Feature | Tax Audit | Tax Review |
|---|---|---|
| Scope | Extensive, detailed examination | Limited, focused verification |
| Method | In-person or mail | Mostly mail or phone |
| Duration | Weeks to months | Usually a few weeks |
| Documentation Requested | Comprehensive records and explanations | Specific documents or clarifications |
| Potential Outcomes | Additional tax assessments, penalties, or refunds | Generally minor adjustments or none |
Common Misconceptions
- A tax review is not a full audit but a less intrusive inquiry.
- Ignoring IRS notices can lead to penalties or enforced collections.
- Audits are not exclusive to high-income earners; any return can be audited.
- Panic is unnecessary; most audits and reviews conclude without major issues if documentation is provided.
Frequently Asked Questions
Q: Can I refuse to respond to an IRS audit or review?
A: No. Ignoring IRS correspondence may lead to penalties or enforced tax assessments. Always respond promptly and seek professional advice if unsure.
Q: Does the IRS charge for conducting audits or reviews?
A: The IRS does not charge fees for audits or reviews; however, if you discover you owe additional taxes or penalties, those are your responsibility. Hiring a tax professional is an optional, separate expense.
Q: Can I appeal the results of an IRS audit?
A: Yes. The IRS offers a formal appeals process to dispute audit findings before they become final.
For further detailed guidance on IRS audits, visit the IRS’s official page on audits.
