3 Reasons to be Wary of a Tax Audit
A tax audit is hardly a deal breaker for moving forward with life. After all, an audit doesn’t necessarily mean you owe more tax or did anything wrong.
And of course a celebrity businessman who has famously been under near-constant audit for the last two decades has just been elected president of the United States.
But there are several good reasons to be wary of a tax audit. In this post, we’ll list three of them.
Audits require considerable time and effort to gather documentation.
There are two types of audits: in-person or by mail (correspondence audits). Regardless of which type you face, getting ready for the audit requires a lot of time and effort to gather the necessary documentation.
The documentation may consist of bank records, receipts for expenses or other types of financial information. Gathering all of this together can take a lot of time and a lot of effort – even if the audit ultimately concludes that you don’t owe any more tax.
Sometimes audits can drag out past the statute of limitations.
The general rule is that the IRS can go back three years to audit your taxes. If a substantial error is involved, however, or there are allegations of criminal activity, the period can be extended so that the IRS goes back up to six years.
There is also the possibility that the IRS will ask you to voluntarily extend the limitations period while you are gathering the requested information. This can add a lot of anxiety to the process when you don’t have clarity about how far back the IRS can go.
Most criminal investigations begin with civil audits.
A civil audit does not imply any allegations of criminal tax evasion. It’s important to keep that point in mind so that you don’t get overly worried about an audit notice.
It is also true, however, that most criminal investigations begin with civil audits. This means that if you run into serious compliance problems, an audit could potentially lead to criminal charges.