Accounting Articles > IRS Audit:

What is an audit?

By definition, an Audit is an examination of claims.

The numbers entered on either an Income Tax Return or a Payroll Tax Return are claims.

For example, if you claim $1,000,000 in sales, the Internal Revenue Service might investigate to make sure you didn't really have $2,000,000 in sales, in which case you would be guilty of evading income tax on the additional $1,000,000. Your Payroll Tax Return might claim that in a particular quarter you had $35,000 in payroll. The Internal Revenue Service might audit that claim to make sure you didn't in fact have $50,000 in payroll, of which you stated $15,000 as payment to independent contractors.

In the examination, auditors need to see source documents that are by definition untainted. The documents must clearly indicate their source, such as a canceled check from a bank or a receipt from a vendor, in order to be considered evidence. Documents which could have been altered or fabricated will be considered tainted, and are therefore non-evidential.

Let me provide an example of why the law is so particular. Let's say that an auditor asks for a copy of a canceled check. According to the check register, the check was a $5,000 payment for rent, but in fact the payment actually went to the entrepreneur. This payment should have been considered either payroll, or a shareholder loan repayment, or a distribution of profit, any one of which would have created some sort of taxable event. If the physical object of a canceled check were not required, a business owner could simply scan a copy of a check into a computer from a bank statement, digitally replace the name on the check with the landlord's name, and e-mail the altered check to me as evidence.

You can see how easy it would be to beat the system if this were allowed.

Record keeping is just as important today as it was back in the days before personal computers. If you don't have all of the little pieces of paper, and if you are audited, we will have a problem.