How long can the IRS audit me for?

Fortunately for taxpayers, audits don’t last forever and the IRS cannot audit a tax return from any year they want.

In most circumstances, the IRS generally audits tax returns within the past 2 years. The Internal Revenue Code, however, provides a statute of limitations that allows the IRS to audit any return within the past 3 years. For example, if you received a notice of audit in 2016, the IRS can audit a return filed in 2013, 2014, and 2015.

There are a few situations in which the IRS can audit tax returns older than 3 years.

Omission of Income

If the IRS finds that a significant amount of gross income, 25% or more to be exact, is missing from a return, then the statute of limitations is extended. The IRS will then have 6 years to audit that return.

Return Not Filed

If you do not file a tax return for a given year, the IRS does not have a time limit to audit or tax you for that year.

Fraudulent Return

If the IRS finds evidence of fraud or intent to evade taxation within a tax return, they do not have a time limit to audit or tax you for that year.

The Taxpayer Agrees to Extend Statute of Limitations

If an audit is not resolved in time, you may be asked to extend the statute of limitations in order for the IRS to assess additional tax. Agreeing to extend the statute will allow you more time to gather more documentation to substantiate your claim, appeal if you do not agree with the audit results, or to claim a tax refund. You should think carefully before you agree, however. Extending the statute of limitations also gives the IRS more time to complete the audit and find something potentially damaging to you

You can extend the statute of limitations by filling out an IRS Form 872 which extends the audit to a specific date or a Form 872-A that extends the audit indefinitely (this can be revoked by submitting a Form 872-T).

The amount of time each audit takes varies and is dependent on the complexity of the case, the availability of documents, scheduling, and whether or not the taxpayer decides to appeal. Auditors are advised to complete audits within 28 months of the date you filed your tax return or the date it was due, whichever was later. The IRS is legally allowed 36 months from the date filed to close an audit, but the additional 8 months are to spare time for the appeals process.

What to Expect when Interviewed by the IRS

Most Americans subject to audit are lucky enough to complete the process entirely through mail. Those who are not as fortunate must meet face-to-face with an IRS agent to discuss the issues of their tax return.

As if an audit itself isn’t scary enough, most people are even more anxious about the in-person interview. IRS agents are trained to scrutinize your financial history, to pick out any flaws with your tax return, and to get you to say something that may incriminate you further. This absolutely justifies taxpayers’ apprehensions.

The best way to ease the anxiety is to prepare for the appointment. It is crucial to prepare/review documents requested in the initial letter, get representation, and to understand what will happen during the interview.

The IRS will choose the location of the appointment, however they will contact you through phone or mail to determine a convenient date and time. You can request a change of location, however it may not be granted.

Where the appoint will take place depends on whether the audit is an office audit or a field audit. The meeting for an office audit takes place in the office of the local IRS branch. Field audits can take place at either your home, your attorney’s/accountant’s office, or your place of business.

Meetings not related to business may take place at your home but will almost definitely take place in your attorney’s/accountant’s office if you have one. The agent will typically discuss issues with itemized deductions, unreported income, or investments on your tax return. They will examine any substantiation you bring and will determine whether you owe money, are owed money, or there is no change to your return.

Meetings relating to business take place at your place of business where books and records are held. The IRS agent is required to take a tour of and review your business facilities. They will want to examine how you operate your business and look at any major equipment you own. The agent will also question you on wheather transactions are made by cash, check, or credit card.

For both business and nonbusiness audit meetings, the agent will begin by previewing your rights and by summarizing what parts of your return/finances are being examined. The agent will then proceed with specific questions.

It is vital to note that if you have representation, you are not required to attend this meeting and it is better if you don’t. By filling out IRS Form 2848, you grant power of attorney to your representative, allowing them to attend the meeting and negotiate with the IRS. This is highly recommended in that it allows an experienced professional knowledgeable in tax law to take control of your audit. This removes not only the possibility of incriminating yourself during the meeting but also removes the anxiety of meeting with the IRS.

If you choose not to proceed with representation, the face-to-face interview will be challenging.

During the interview the IRS examiner may pursue information, such as financial and employment history, in an attempt to find issues outside the specifics of the audit. IRS agents are trained to scrutinize every word you say and every substantiation you claim. Depending on how you respond, you could potentially expand the scope of the audit to issues and tax returns from other years. This can result in what should have been avoidable fines or even criminal charges for the taxpayer. The agent will take advantage of the taxpayer’s lack of knowledge and will attempt to probe damaging information out of them. Any information you give to the agent can be used against you, no matter how innocent it may seem. This can result in substantial penalties and even a criminal investigation regardless of intent.

It is highly recommended that you do not proceed into an audit alone. The Law Offices of Jef Henninger, Esq. are here to negotiate with the IRS and produce the best outcome for our clients.

Types of Audits: What should I expect during an audit?

Nobody wants to go through an audit, but everyone wants to know what to expect. What many people are unaware of, though, is that there are different ways the IRS will audit you. Your expectations will be dependent on the type of audit. Each type of audit has varying means of correspondence between the taxpayer and IRS, has different levels of participation for the taxpayer, and requires different documents from the taxpayer. To figure out what you should expect during an audit, you must first determine what type of audit you’re experiencing.

All audits begin with a letter that states what parts of your tax return are in question. It additionally specifies when, where, and how you are to respond to the IRS. The taxpayer will also receive an Information Document Request (IDR) that specifies which documents must be gathered by the taxpayer.

Correspondence Audits:

Correspondence audits are the most common type of audit, making up approximately 70% of all audits, and are done entirely through mail. These audits are fairly simple and do not require in-person meetings or extensive investigation. Correspondence audits are primarily for verification issues on a tax return such as justifying income or deductions.

The IRS uses computer systems to examine your tax return and to detect mathematical errors, missing documents, or inconsistencies. The IRS compares the information on your return to information already on record provided by third parties such as banks and employers. Items typically requested by the IRS for verification purposes usually include W-2’s, 1099 income items, itemized deductions, and Schedule C receipts.

If the information from the return conflicts with what is on record or the return is missing significant documents, then the taxpayer will be sent a Letter 566 or a CP 2000.

Letter 566 informs the taxpayer that their return has been selected for audit and will list required documents to be sent back to the IRS. This letter is mostly sent out to substantiate specific claims on a tax return such as itemized deductions as opposed to a broad examination.

A CP 2000 is not a bill, but it can result in an increase, decrease, or no change in your taxes. The CP 2000 is a notification of the mismatched information and a request for additional information. Taxpayers are given 30 days from the date of the CP 2000 (not the day you received it) to respond to the IRS or they will face added penalties.

Although the correspondence audit is the most simplistic type of audit, it is not unusual for a taxpayer to consult an attorney for assistance. The IRS tends to request more than they’re entitled to, so proper representation will be helpful in protecting the taxpayer.

Office Audits:

Not nearly as common as correspondence audits, office audits are more comprehensive looks at an individual’s financial history. These are conducted through interviews with an auditor in person at the local IRS office.

A letter is sent to the taxpayer that lists specific items on their tax return that are in question. The IRS requests that you bring in substantiation or any documents that can justify the questionable items in to the IRS office.

Office audits are far more troublesome for the taxpayer in that during the interview the IRS examiner may pursue information, such as financial and employment history, in an attempt to find issues outside the specifics of the audit. IRS agents are trained to scrutinize every word you say and every substantiation you claim. Depending on how you respond, you could potentially expand the scope of the audit to issues and tax returns from other years. This can result in what should have been avoidable fines or even criminal charges for the taxpayer.

It is highly recommended to bring an experienced tax attorney to the interview. Proper representation can protect the taxpayer from the IRS overstepping their bounds and can prevent further investigation.

Field Audits:

Field audits are the most thorough investigations conducted by the IRS with the purpose of uncovering major violations. These audits are done by highly trained revenue agents who review the entirety of an individual’s or firm’s financial/tax history. It is the agent’s goal to uncover issues with the taxpayer’s reported income and deductions.

They’re called field audits because the revenue agent will interview the taxpayer in their own home or place of business. Most businesses are audited this way so the agent can review all records related to the return and to interview the owners. If you hire professional representation, however, the first meeting will more than likely take place in your attorney’s office.

The agent will examine a tax return to discover any flaws or inconsistencies such as unreported income or improper deductions. After examining one year’s return, the agent can open other years’ tax returns if issues are found. The agent is not limited to tax returns but may also examine records such as credit databases and property records.

The investigation will go as far where the agent will examine the taxpayer’s general expenditures. If the agent finds that the expenditures surpass the reported income, the agent will assume there is unreported income and the burden lies with the taxpayer to prove otherwise.

It is crucial to contact an attorney or accountant as soon as a field audit has begun. Similar to the office audit, the agent will take advantage of the taxpayer’s lack of knowledge and will attempt to probe damaging information out of them. Any information you give to the agent can be used against you, no matter how innocent it may seem. This can result in substantial penalties and even a criminal investigation regardless of intent. By using IRS Form 2848, you authorize power of attorney which grants an experiences representative the power to settle tax matters on your part. Here at the Law Offices of Jef Henninger, Esq., we have the means and experience to shield you from the potential dangers of a field audit.

Why am I being audited?

You’ve received a letter from the IRS notifying you that your tax return from last year is undergoing an audit and the first question that comes to mind is, “Why me?” Unless you’re intentionally committing a tax crime such as tax evasion or under-reporting your income, you probably won’t know beforehand why you were chosen to be audited. After your tax return has been reviewed by the IRS, there are a variety of different reason the return will be audited.

Auditor Examination

When a return is reviewed individually by an auditor, they may either accept it as filed or pass it on to an examining group if anything on the return raises suspicion. If the manager of the examining group also does not accept the return as filed, the return is given to an auditor for one final examination. At this point either the return will be accepted or the taxpayer will be audited.

Computer Analysis

The majority of audits are chosen by computers that conduct a statistical analysis of tax returns to determine the likelihood of the information on the return to be correct. The IRS uses a couple different computer systems such as the:

  • Discriminant Function System (DIF): This system analyzes a tax return and gives it a score, called the DIF score, based on how accurate it appears to be. The higher the DIF score, the more likely the return is to be audited. The IRS does not disclose the specifics on how this system works, but it is believed that many factors are considered with deductions and exemptions being of most importance.
  • Unreported Income Discriminant Function (UIDIF): This program determines the likelihood for a return to have unreported income based on an expense to income ratio. If the program finds that an individual or firm is spending significantly more money than it makes, unreported income is probably occurring, triggering an audit.
  • Information Returns Processing System (IRP): The third program the IRS uses information gained from third parties that are required to report taxpayer income to the IRS such as employers and banks. If the income listed on your tax return is inconsistent with the data given by the employer, you are likely to be audited.

Related Audits

If the IRS audits a tax return involving transactions with other taxpayers or businesses and that return had questionable items, it is likely that individuals and businesses associated with the suspicious return will be audited.

Random Selection

While this method is not used very often, the IRS does use computer screening and random selection to determine which returns will be audited.

High Income

Your income can determine the likelihood of the IRS auditing you. The more income you make, the more likely you will be audited. IRS statistics state that over half the audits conducted are for taxpayers making over $1 million per year. In fact, even if you make $100,000 per year your chances for being audited are much higher than average. High-income taxpayers claim more deductions and contribute more to charity, leaving more room for error on a return and more reason for the IRS to take a closer look.

Document Matching

The IRS will audit a tax return if the information provided on the return does not match other records. For example, if the income listed on a tax return does not match the income listed on a Form W-2, the return will be audited.
Whether you’ve been audited for inconsistent records, missing documents, or even randomly selected, you shouldn’t try to handle an audit all on your own. The Law Offices of Jef Henninger, Esq. provide professional representation during audits, taking the burden off your shoulders and ensuring the audit settles in your favor.

Audit Overview: What is an audit?

Most people agree that finding the dreaded letter in the mail issued by the IRS is nothing short of a financial nightmare. The confusing nature of tax law and the demands of the IRS make the process extremely overwhelming. A lot of people, however, may not know what an audit actually entails.

An audit is a review of an individual’s or a firm’s tax return and finances conducted by the Internal Revenue Service  to ensure that the amount of tax reported is correct. The majority of taxpaying individuals and businesses are audited because the information they provided either has noticeable numerical discrepancies or falls outside of what the IRS considers statistically normal. This is determined by both computer analysis and direct examination by IRS agents.

If, for example, you state that you make $65,000 a year yet claim deductions on your tax return of $80,000, this inconsistency is an obvious red flag to the IRS and will most likely trigger an audit.

After an audit has been triggered, the process begins with a notification by mail or phone. There are three different ways the IRS can execute an audit. Correspondence is usually through mail but may eventually result in face-to-face meetings with an agent — whether it is in an IRS cubicle, your place of business, or even your own home.

Not all audits are extensive examinations with tremendous consequences, some can be minor. Sometimes an agent finds a hole in your tax return that can be resolved by one missing document. Documents typically requested by the IRS include bank statements, payroll tax filings, canceled checks, deposit slips, and receipts. Other times, audits can be intense and drawn out, lasting up to 2 years. Depending on the severity of the error found in the tax return and whether or not the error was intentional, audits can result in bills, fines, and/or criminal charges.

It is important to note that when the IRS spots an error in your tax return such as a suddenly higher income, the burden is on the taxpayer to substantiate any claims.

The audit ends when the agent has collected all necessary documents and finished reviewing your records. They will then decide to accept your tax return as filed resulting in no changes or not to accept the return as filed resulting in additional tax with interest billed to you. If you do not agree with the auditor’s conclusion, you can appeal for further review.

Most Americans do not have extensive knowledge of tax law, making an audit seemingly impossible to get through. To make matters worse, IRS agents take advantage of this and obtain information they are not entitled to that will end up hurting you.

You don’t have to go at it alone. Proper representation during an audit can relieve the aggravation and level the playing field between the taxpayer and the IRS. The Law Offices of Jef Henninger, Esq. employs extensive legal and accounting experience to provide professional assistance in lessening the workload, financial consequences, and overall frustration of an IRS audit. Don’t hesitate to acquire representation, all it can do is help.