How far back can the IRS audit you? Here’s what you should know about the IRS audit process, and what to do if you receive a notice.
One of the IRS’s main functions is to investigate tax fraud. The government has a vested interest in tackling tax fraud, even more so than tax negligence or tax tardiness, because the former requires malicious intent and manipulation.
But because the IRS has to sift through the data of millions of US taxpayers every single year, it automates a good portion of this process to skim through to the most suspicious accounts. This generally means that many Americans who are initially scrutinized by the tax man are innocent – and for that reason, IRS investigations range from near harmless (for the majority of cases) to serious.
If you’ve received notice that the IRS is going to audit you, the last thing you should do is panic. Audits happen randomly at times when testing a new system, and audits may be triggered by any number of potential reasons – none of which immediately implicate you in any sort of crime.
How Far Back Can the IRS Audit You?
Furthermore, the IRS cannot audit or investigate every shred of tax information on you, and have time limit on how long they can audit you. How far back can the IRS audit you? As of today, the IRS can audit either:
- Any tax return filed in the last three years.
- Any tax return filed in the last six years, if the IRS sees reasons to dig deeper (such as substantial underreporting or foreign assets, which can prolong the investigation).
- Any tax return filed ever, indefinitely, if you never filed your taxes to begin with or are being investigated for tax fraud.
The more severe the IRS’s suspicions, the more thorough the audit. The IRS also has the ability to extend the tax assessment period, or the statute of limitations, given certain circumstances. More about these in Publication 1035.
When Does the IRS Perform Audits?
Audits are triggered by one of three reasons:
- As part of an ongoing investigation.
- A random selection in a testing program for the IRS’s computer screening process.
- A red flag appeared on the IRS’s automated computer screening process.
Unless your tax account is under review as part of an ongoing investigation into someone else, please note that the vast majority of tax audits are a simple matter of having an IRS agent mail you about an audit, contact you to ask about a discrepancy, request some basic financial information confidentially (usually via mail), and make a simple decision based on the information. This decision will be one of three:
- Decide that you owe the IRS more money.
- Decide that the IRS owes you money.
- Decide that no change will be made to your tax account.
Any decision made by the IRS can be protested and appealed through the Independent Office of Appeals, or through tax court. Be sure to run that idea by your tax professional first, to make sure you have a case.
What’s an IRS Audit Like?
Most audits are called correspondence audits because they occur almost entirely over mail. The IRS will do very little if any telephone calls during the audit process and will never request any kind of sensitive information over the phone. This is important to help distinguish the IRS from a potential phishing scam.
The IRS also provides a lengthy list of industry-specific IRS guides to help taxpayers and businesses learn what to expect. These are basic rules of engagement the IRS follows when conducting an audit. You can also check out this short educational video.
If the audit requires more input than just mail-to-mail correspondence, it may graduate into an in-person audit. In-person audits are conducted either at an IRS office nearby (also known as an office audit) or at the taxpayer’s residence or place of business (a field audit).
The IRS is not trying to intimidate you. Audits are generally boring. Be sure to correspond with your accountant and tax professional to prepare all the information the IRS requested in the letter sent to you, so you can get things over with as quickly as possible.
If the IRS audited you because of a mistake you made, note that you will most likely not get into any trouble. They might cut into a tax credit to make up for the taxes you failed to pay as a result of your mistake, or send you a bill via your tax account, and give you a deadline to pay your balance.
What Triggers an IRS Audit?
There are a large number of factors that go into what triggers an IRS audit, and no one knows exactly how the IRS’s screening process is scripted. We do know that certain mistakes and behaviors cause you to be more likely to be audited. Some basic things that seem to trigger an audit more often include:
- Underreporting income.
- Massive income discrepancies.
- Large and frequent cash transactions.
- Suspicious math errors.
- Claiming too many deductions.
- Rounding up or down constantly.
In other words, anything that might seem suspicious or cause your tax return to look a lot different from the average tax return of someone in your income class and occupation may trigger an automated red flag, requiring a human being to go over the document and contact you if the need for more information arises.
What Happens When the IRS Finds Something?
If the IRS finds a discrepancy and changes your tax account, you will be in debt to the IRS. This is easily fixed by paying said debt. You can check your tax account through the IRS website.
If you were audited as a result of an unfiled tax return, you’ve also got penalties waiting for you. Note that these generally aren’t as bad as you might expect – but they can pile up and become worse the longer you ignore them. The IRS can leverage penalties and interest to pressure you into paying sooner rather than later – which you should.
Failing to pay incurs further penalties, eventually leading to liens and levies. If you’re worried about how you’re going to deal with a tax debt, or have an ongoing tax debt problem, you need to contact a professional.
File Your Taxes!
One of the worst ways to be audited is for an unfiled tax return. This is because there is no statute of limitations on a return that doesn’t exist, so the IRS can hound you until you file it. If you need help with your taxes, speak to our professionals today!