Legal Definitions - audit of return

An audit of return refers to an official examination conducted by a tax authority (such as the Internal Revenue Service in the United States or His Majesty's Revenue and Customs in the UK) of a taxpayer's submitted financial documents, most commonly a tax return. The primary purpose of an audit is to verify the accuracy, completeness, and legitimacy of the information reported by the taxpayer, ensuring they have complied with all applicable tax laws and regulations.

Here are some examples illustrating an audit of return:

• Example 1: Sarah, a freelance graphic designer, receives a notice from the tax authority stating that her recently filed income tax return has been selected for an audit. The notice requests documentation to support several large business expense deductions she claimed, such as home office costs and professional development courses.

  Explanation: This situation demonstrates an audit of return because the tax authority is officially reviewing Sarah's submitted income tax return. They are seeking to verify the accuracy and legitimacy of the deductions she reported, ensuring her compliance with tax laws regarding business expenses.

• Example 2: A small local bakery, "The Daily Loaf," has consistently reported very low gross sales on its annual business tax returns for the past three years, despite being located in a high-traffic area. The state's department of revenue initiates an audit of the bakery's sales tax returns and income statements to investigate the discrepancy.

  Explanation: This is an audit of return because the state tax authority is conducting an official examination of "The Daily Loaf's" submitted business tax documents. Their goal is to verify the reported sales figures and ensure the bakery has accurately accounted for and paid its sales and income taxes.

• Example 3: A large multinational corporation, "GlobalTech Inc.," claims substantial tax credits for research and development (R&D) on its corporate income tax return. The national tax agency decides to conduct an in-depth audit of GlobalTech's return, specifically focusing on the eligibility and documentation supporting these significant R&D claims.

  Explanation: This scenario illustrates an audit of return as the national tax agency is officially scrutinizing GlobalTech Inc.'s corporate income tax return. They are verifying the accuracy and validity of the complex R&D tax credit claims to ensure the corporation is entitled to them under tax law.