What Does a Tax Auditor Do? Key Responsibilities
Gain insight into the multifaceted role of tax auditors, ensuring financial compliance and tax system integrity.
A tax auditor is a financial professional who examines financial records and tax returns to confirm compliance with applicable tax laws and regulations. These auditors play a role in maintaining the integrity and fairness of the tax system by ensuring individuals and organizations accurately report their income, deductions, and credits. They work to identify discrepancies, potential non-compliance, and errors, to verify that the correct amount of tax is paid. This ensures taxpayers contribute equitably to public services.
Different Types of Tax Auditors
Tax auditors operate across various levels of government. Federal tax auditors, with the Internal Revenue Service (IRS), focus on compliance with federal income tax laws. Their audits often involve reviewing complex individual and business tax returns to ensure adherence to the Internal Revenue Code.
State tax auditors, work for their state’s department of revenue and focus on state-specific taxes. This can include state income tax, sales tax, unemployment tax, or excise taxes. While federal and state audits are distinct, significant issues found in one can sometimes prompt an audit by the other.
Local tax authorities also employ auditors, with a narrower scope, focusing on local taxes like property taxes, business license taxes, or local sales taxes. Their objective is consistent: to verify that taxpayers are meeting their obligations under the tax laws governing that jurisdiction.
Core Responsibilities of a Tax Auditor
Tax auditors examine financial information to ensure tax compliance. They review submitted tax returns for accuracy and completeness, comparing the reported figures against various financial documents. This initial scrutiny helps identify inconsistencies that warrant further investigation.
Auditors examine financial records like bank statements, general ledgers, invoices, and receipts to verify reported income and expenses. They look for documentation to support claimed deductions and credits, ensuring that all financial transactions align with the figures reported on the tax return. This thorough review helps to substantiate the taxpayer’s financial position.
Identifying discrepancies or non-compliance is a central task. They apply tax laws to the financial data, assessing if the taxpayer has correctly interpreted and applied rules. This analytical process can uncover underreported income, unsubstantiated deductions, or incorrect calculations of tax liability.
After their analysis, auditors calculate underpayments or overpayments. They determine the correct tax based on their findings and the tax code, which may result in proposed adjustments. This investigative and analytical work forms the bedrock of ensuring fairness and accuracy within the tax system.
How Tax Auditors Conduct an Audit
A tax audit begins with selecting a tax return for examination, often based on statistical analysis or discrepancies identified by computer programs. Once selected, the taxpayer receives an official notification, usually by mail, outlining the audit’s scope and required information.
Auditors then proceed to request specific documentation from the taxpayer, which might include bank statements, payroll records, invoices, receipts, and other financial records that support the figures on the tax return. The method of audit can vary, from a simple correspondence audit conducted entirely by mail for minor issues, to an office audit where the taxpayer meets the auditor at a tax agency office, or a field audit where the auditor visits the taxpayer’s home or business for more complex cases.
During the audit, the auditor analyzes the gathered data, comparing it against the tax return and applicable tax laws. They may conduct interviews or engage in correspondence with the taxpayer or their authorized representative to clarify information, understand specific transactions, or request additional supporting documents. If complex issues arise, the auditor may collaborate with internal specialists, such as forensic accountants or legal experts, to ensure a comprehensive review.
The auditor’s actions during this phase are focused on fact-finding and verification. They aim to build a clear picture of the taxpayer’s financial activities as they relate to their tax obligations, using the requested documents and discussions to reconcile any differences or confirm compliance. This systematic approach ensures all aspects of the tax return under review are thoroughly examined.
Concluding an Audit and Reporting Findings
Once the tax auditor completes their examination of the financial records and tax return, they prepare their findings. The auditor will propose adjustments or changes to the taxpayer’s return if discrepancies or non-compliance are identified. These proposed changes reflect the auditor’s determination of the correct tax liability.
The auditor then discusses their findings with the taxpayer or their authorized representative, explaining the reasons for any proposed adjustments and referencing the relevant tax laws. This discussion provides an opportunity for the taxpayer to understand the audit’s outcome and, if they agree, to sign an agreement form.
If the taxpayer agrees with the proposed changes, the audit concludes with the taxpayer making any necessary payments or receiving a refund. However, if the taxpayer disagrees with the findings, the auditor’s role is to explain the available options, which typically include the right to appeal the decision.
The auditor will issue formal notices or reports detailing the audit results, such as a Notice of Deficiency if additional tax is owed. If the taxpayer chooses to appeal, the auditor’s direct involvement in the case generally concludes, and the matter progresses to an appeals process within the tax agency, where an independent review of the findings can occur.