An audit occurs when the Internal Revenue Service selects your income tax return for review. During the audit, the IRS will analyze your return and supporting documentation to ensure that all entries are accurate. Since most audits occur after the IRS issues refunds, you will probably receive your refund even if the IRS selects your return for an audit.
The IRS selects returns for audit using several methods. The IRS chooses some returns for audit based on computer algorithms that score returns based on their potential for inaccuracies. The IRS also audits returns that contain information different from the information reported on other forms the IRS receives regarding your income, such as 1099s or W-2s. Finally, the IRS audits the returns of certain large corporations each year, regardless of the return's perceived accuracy.
If the IRS selects your return for audit, you will complete the process either by mail or in person. If the IRS assigns you an in-person audit, it will take place at your home, your accountant's office or an IRS office. If the IRS designates that it will conduct the audit by mail, you must mail any relevant paperwork to the IRS. The audit notification you receive will indicate the paperwork needed for the review.
After the auditor reviews your information, he may suggest changes to your tax return. If you agree to these suggestions, the auditor will amend your return accordingly. Depending on the nature of the changes, you may owe additional money to the IRS, or you may receive a refund of tax you have already paid. If the auditor suggests no changes, you will neither owe nor receive any additional funds. If you disagree with the changes suggested, you can appeal the audit in court.
Although most taxpayers will receive their refunds long before the IRS begins choosing returns for audit, the IRS may hold your refund if your return includes certain obvious errors, such as impossible deductions or omissions of documented income. If you receive your refund and the IRS later chooses your return for audit, you may need to return a portion of the refund, depending on the audit's outcome.