The IRS has the legal authority to examine your financial records.
If the Internal Revenue Service suspects that your tax returns, either for personal or business tax, are not reflecting the reality of your income and expenses, it may audit your tax filings. Tax audits are not voluntary, and they require time and close attention to the records you relied on to complete your tax returns. In addition, it's wise to remember that the IRS has legal access to a wide range of financial information.
Audits
At any time, the Internal Revenue Service can order an audit of your tax returns. The agency will send a letter informing you of the audit. The letter may also demand that you have certain documents available, including copies of your bank account records over a certain period. Audit letters usually specify problem areas on your returns, allowing you to gather and prepare relevant documents for the IRS examiner.
Authority
The IRS has the legal authority to examine any and all of your banking records (as well as debit and credit card records). If you do not produce them voluntarily, the agency will simply demand them from the bank, which is legally required to comply. If you have closed accounts that you do not disclose, the agency has access to informational databases that list accounts opened in previous years.
Accountants
If you have used an accountant for your personal or business returns, the IRS may also issue a demand letter, or a subpoena, for that accountant's records and information regarding your bank accounts. The IRS is more likely to audit individuals who prepare their own taxes, going on the assumption that accountants will be more diligent in preparing a legal and complete return.
Self-Employment
If you are self-employed, the IRS will be particularly interested in your personal bank accounts. The agency goes on the assumption that for the self-employed, business and personal expenses are closely tied together and that you may have not disclosed income earned through the business (but deposited into your personal account). In addition, your personal expenses may have been deducted from your business income, which is a no-no.
Preparation
If the IRS schedules an audit, prepare your bank account statements, tax returns, and any other paperwork related to your income, expenses and deductions. You must arrive at the location of the audit on time and prepared. If you delay the audit, any penalties and interest owing on back taxes will increase.
Suspect Transactions
You must be prepared to explain deposits and withdrawals on the account and any unusual activity, such as several withdrawals taken closely together or unusually large deposits. You must also be able to explain itemized deductions on your tax return, as evidenced by your account statements, and further document expenses with dated receipts.
