Tax season can be a stressful time for many individuals and businesses, especially with the looming possibility of an audit by the Internal Revenue Service. Audits, although intimidating, serve an important purpose in maintaining the integrity of the tax system.
In the event the IRS ever performs an audit of your taxes, it helps to understand the agency’s reasoning regarding this process.
Ensuring compliance with tax laws
The primary goal of IRS audits is to verify the accuracy of tax returns. By scrutinizing financial records and supporting documentation, the IRS aims to confirm that taxpayers have reported their income, deductions and credits accurately. This examination maintains fairness in the tax system and prevents individuals and businesses from engaging in fraudulent activities.
Targeting high-risk areas
IRS audits often target high-risk areas where errors are more likely to occur. These areas may include excessive deductions, unusually high or low income and other red flags that raise suspicion. By focusing on these specific aspects, the IRS can allocate its resources to address potential non-compliance.
Deterrence and education
Beyond the immediate goal of ensuring compliance, audits serve as a deterrent to potential tax evasion. The knowledge that the IRS conducts audits acts as a powerful incentive for individuals and businesses to adhere to tax laws, discouraging dishonest practices. Additionally, audits provide an educational function by highlighting common mistakes and promoting better understanding of tax regulations.
Fair distribution of the tax burden
By conducting audits, the IRS plays a vital role in maintaining a fair distribution of the tax burden. When some individuals or businesses fail to meet their tax obligations, it places an additional burden on those who comply with the law. Audits help identify and rectify these disparities, ensuring that everyone pays their fair share and contributing to the overall functioning of a just and equitable tax system.
As reported by the IRS, the agency completed 708,309 audits in 2022. While the thought can be stressful, knowing why audits typically occur can offer some peace of mind.