What Is a Desk Audit and How to Prepare
Demystify the desk audit process. Gain clear insights into this correspondence-based review, ensuring you are prepared for its stages and outcomes.
A desk audit is a review of financial records and tax returns, initiated when a tax authority (such as the IRS) sends a written notice requesting specific documentation to verify reported information. This process aims to ensure compliance with tax laws and the accuracy of income, deductions, and credits. Unlike more extensive examinations, a desk audit focuses on particular items or discrepancies.
Understanding a Desk Audit
A desk audit involves the tax authority requesting information by mail or through an online portal. This contrasts with a field audit, where an auditor conducts an in-person review at the taxpayer’s home or business, or an office audit, which requires the taxpayer to meet an agent at a tax authority office. Desk audits are the most common and least intrusive. They focus on specific issues or discrepancies rather than a comprehensive review of all financial records.
The scope of a desk audit is limited to particular items on a tax return, such as income streams, claimed deductions, or tax credits. Reasons for receiving a desk audit notice vary, often due to automated systems flagging inconsistencies or unusual entries. Common triggers include discrepancies between information reported by third parties (like employers or banks) and your return, or deductions disproportionately high compared to income. While some audits are selected randomly, many are initiated due to these identifiable issues.
Preparing for a Desk Audit
Upon receiving a desk audit notice, first carefully review the letter to understand what information is requested. The notice will specify the tax year under examination and the particular items requiring substantiation. Tax authorities request documents that support the income, credits, or deductions claimed on the return.
Gathering and organizing these documents systematically is essential for a smooth audit process. These include income statements like W-2s and 1099s, receipts for expenses, invoices, canceled checks, and bank or credit card statements. For business-related inquiries, such as payroll records, asset and depreciation schedules, and detailed ledgers may be necessary. All records should be organized by year and by the type of income or expense they represent, with clear labels for easy reference.
Maintaining meticulous records throughout the year simplifies this preparation. If original documents are unavailable, digital copies, bank statements, or other third-party records might serve as acceptable alternatives. If records are missing, providing a reasonable explanation to the auditor and attempting to reconstruct the information can be helpful.
Responding to a Desk Audit
After gathering and organizing all requested documents, submit them to the auditing body. The audit notice will provide specific instructions on how and where to send the information, typically through mail or an online portal. Send copies of all documents, never the originals, and retain your own complete set of records for future reference.
Adhering to the specified deadline in the audit notice is important, as failure to respond promptly can lead to disallowance of claimed items and potential additional tax assessments. If more time is needed, you can request an extension, though it is not guaranteed. When communicating with the auditor, be clear and concise, addressing each questioned item directly with supporting documentation.
Include a cover letter summarizing the submitted documents and referencing the specific items from the audit notice. Keeping a detailed log of all communications, including dates, names, and topics discussed, is useful. While many desk audits can be handled by the taxpayer, seeking professional assistance from a tax attorney or accountant can be valuable, especially for complex issues.
Potential Outcomes of a Desk Audit
After the auditing body reviews the submitted information, there are three possible outcomes for a desk audit. One favorable outcome is a “no change” decision, meaning the taxpayer successfully substantiated all reviewed items and no adjustments are made. This indicates the information provided aligned with the tax authority’s expectations.
Another possibility is that the audit identifies an overpayment, resulting in a refund. While less common, this can occur if the audit uncovers errors that previously led to a higher tax liability. The third outcome is that additional tax is determined to be due, along with potential interest and penalties. This happens if the audit finds that income was underreported, or deductions or credits were claimed incorrectly without sufficient support.
If additional tax is assessed, the taxpayer will receive a bill. In such cases, the taxpayer can agree with the findings and pay the amount due, or choose to disagree and explore options such as an appeal. The duration of a desk audit can vary, but many are resolved within a few months, particularly if the taxpayer provides a thorough and timely response.