Glossary term
Tax Audit
Subject: Legal, Tax and Reporting, Tax Compliance and Governance
Also known as: Tax inspection, Tax examination
A tax audit is an examination by a tax authority of a taxpayer's returns, records and transactions to check that tax has been correctly reported and paid.
Explanation
Authorities select taxpayers by risk scoring, random sampling, third-party information, whistleblower tips or sector campaigns. Audits range from a letter asking for an explanation to a full field audit on the premises, which may cover several years. The taxpayer must produce books, contracts, invoices and system data. The authority can then accept the return, adjust it, and charge extra tax, interest and penalties, with a right of appeal. Large companies may be under continuous review with an assigned team. Some countries also require independent tax audits by an accountant for certain taxpayers, which is a different meaning of the term. Good records, consistent positions and clear documentation, such as transfer pricing files, make audits shorter. Teams that keep supporting files ready answer queries quickly, and a quick answer often narrows the audit.
Example
A tax authority selects a retailer after noticing that its reported profit margins are far below those of similar firms. Inspectors visit for six weeks, review sales systems and supplier invoices, and find that some cash sales were not entered. They issue an assessment for the unreported income, plus interest and a penalty.
Not to be confused with
- Statutory audit
- A statutory audit checks financial statements for owners and investors. A tax audit checks tax compliance for the tax authority.