An IRS audit is a review or examination of an organization's or individual's accounts and financial information to ensure information is being reported correctly, according to the tax laws and to verify the amount of tax reported is accurate. At least that's what the IRS says.
In reality, there aren't many things more frightening or humiliating than getting the Certified Letter that makes you catch your breath, while your heart pounds in your chest. It's a scary term - audit. But is an audit really that bad, other than the similarity between an audit and the days when your mother used to root through your underwear drawer?
Just because you've been served notice that you're being audited doesn't automatically infer that you've done anything wrong and your accountant or accounting firm can verify that. Nor does it always suggest that an error has been made.
Returns to audit are chosen through a number of ways, including random selection and computer screening and sometimes returns are selected based solely on a statistical formula.
Other audits are spurred on by triggering issues. One example of an issue that can trigger an audit is document matching - when payor records, such as Forms W-2 or Form 1099, don't match the information reported on your return.
Returns may be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns have already been selected for an audit. Like your mother said, watch out who you hang around with - they can get you in trouble!
