How Far Back Can or Does the IRS Audit You?
When the IRS sends you an audit letter, it may dent your day. When can the IRS audit your finances? There are exceptions to the general rule that states an IRS audit cannot go back more than three years.
How far back in time can or Does the IRS audit?
The IRS will likely include those returns in their audit if you have filed your taxes within the last three years. On the other hand, the IRS has the authority to examine previous years if it finds a significant mistake while conducting the audit. It is highly unusual for an IRS audit to extend beyond six years.
Although there is no statute of limitations for certain tax matters, the IRS has a six-year statute for audits. For example, an audit can be conducted at any moment if Form 3520 pertains to foreign income, inheritances, or gifts over $100,000 are not filed.
There are a few more cases that you should know about as well. The IRS can audit you anytime if you have never filed a tax return. Also, if you need to remember to sign your return, the IRS can think it was never filed. The same is true if someone made a fake tax return in the past.
So, what exactly is an audit?
An audit by the IRS involves looking at the books of a person or business. Certainly, the IRS wants to verify this to ensure taxpayers follow all tax regulations. Verifying the absence of tax evasion is one objective of a tax audit.
What makes an audit trigger?
The majority of audits are randomly selected. However, the IRS may initiate an audit if specific tax issues exist.
Some common reasons for an IRS audit trigger are:
Not disclosing any income that is taxed
Copies of your W-2s and 1099s are sent to the IRS. The IRS may ask for a review if you still need to include a 1099 on your tax return. Should you observe any anomalies on your W-2s or 1099s or obtain a 1099 that is not yours, promptly notify the issuer and request that they forward a corrected copy to the IRS.
High income
Those with higher incomes are significantly more likely than those with lower incomes to be audited. Further, the IRS claims that people who make $10 million yearly have much higher audit rates.
large deductions for charity contributions
The amount donated may easily be verified when you submit a check to a charity. That is another matter when you give something to a charitable organization. Consequently, a tax audit may result from the taxpayer’s need to assess the item’s value.
In brief, get an expert’s opinion on the item’s fair market worth if you donate it if its value is $500 or more.
Inaccurate calculations
The IRS may review your tax return if they discover a numerical mistake. That remains true regardless of whether the IRS made a mathematical mistake.
Too many deductions
The IRS has data on the typical deductions made by filers in your income group for specific goods. To invite IRS inquiry, you must stay within these averages. Therefore, it would be best if you did not hesitate to claim all of your allowed deductions as long as they are reasonable and supported by evidence.
Filing Schedule C
Tax audits are more likely to focus on self-employed individuals than employees. Primarily if the operating cash base is more likely to be the company’s responsibility.
Indeed, the IRS knows that self-employed taxpayers are more likely to engage in tax fraud and income concealment than individuals working for other parties.
Home office deduction
The requirements for the deduction for a home office are tight. Qualifying self-employed individuals and independent contractors are the only ones who can claim this deduction. Generally, an individual’s primary residence may double as their place of business, provided that a specific area within the residence is devoted solely to company operations. Workers who do their jobs from the comfort of their own homes are not eligible to claim the home office deduction.
Entertainment, business lunches, and travel expenses
Because this is a frequently misused category, the IRS thoroughly reviews it. Obtain receipts, note the reason for each expense, and keep track of who else was present. Further, you cannot deduct these costs if your employer pays them back.
Making a business out of a passion
The IRS distinguishes between a real business and a hobby regarding an undertaking for which a person claims deductions. Whether the activity is carried out in a way that is appropriate for a company and whether you maintain correct records are two criteria for a business.
Additionally, there should be proof that the investment of time and funds indicates a desire to turn a profit. The three out of five test is a criterion for profitability. The business is probably legitimate if it turned a profit in three of the preceding five years. During that window, claim a loss three times, and you should anticipate hearing from the IRS.
100% of a vehicle's usage for business
It is uncommon for someone who uses a personal vehicle always to utilize it for work-related purposes. Whereas, this is particularly true if the individual has one car.
There are exceptions, but if you make this claim, be sure you have solid supporting evidence.
Earned Income Tax Credit (EITC)
Audit rates for returns that claim the Earned Income Tax Credit are much higher. The IRS wants to review EITC claims to avoid fraud because EITC payments are frequently made in error.
What information is required for an IRS audit?
The IRS requests copies of the supporting documents for your claims. It can ask for particular records from you.
These documents could contain:
- Bills
- Canceled checks
- Legal papers
- Loan agreements
- Receipts
Medical and dental records, business tickets, diaries, logs, and other pertinent documents may be requested by the IRS during an audit, depending on the purpose of the audit.
What is the typical duration of an IRS tax audit?
How Far Back Can or Does the IRS Audit You?
Tax audits typically last up to two years. In addition, the type of audit, the complexity of the issues linked to your tax returns, and the timing of your information requests will all play a role in determining the actual duration of the audit.
An essential factor in the outcome of an audit is, of course, the taxpayer’s position on the findings reached by the IRS. Therefore, it is recommended that taxpayers who have legitimate objections to an IRS agent’s determination based on their tax returns consult with a tax attorney or other tax advisor who focuses on audit defense and audits by the IRS for guidance regarding the applicable tax laws.
What occurs if you accept the audit's findings?
Signing an examination report or comparable form indicates your agreement with the findings, depending on the type of audit. Moreover, several payment alternatives are available from the IRS if you owe additional tax. How can you pay? The IRS will tell you.
What do you do next if you find a problem with the audit findings?
How Far Back Can or Does the IRS Audit You?
You can do something if you disagree with what the IRS audit found. However, the first step is to ask to meet with an IRS manager.
Mediating your appeal is one option among many forms of ADR (Alternative Dispute Resolution). Through alternative dispute resolution (ADR), a certified mediator helps you and the IRS agent handling your case reach a mutually agreeable resolution. In the early phases of a disagreement, when there are few issues at stake and you have evidence to support your viewpoint, mediation is a good option. In truth, mediation is not a chance to spill the beans or buy extra time.
An appeal can be filed up until the statute of limitations expires. The IRS claims that its Independent Office of Appeals aims to find non-judicial solutions to disagreements. In this case, your and the government’s interests must be considered relatively and unbiasedly throughout the process.
You should consult a tax expert like Credow, who can represent your interests when negotiating with the IRS.
What does a tax levy mean?
If you are audited, the IRS may decide to levy your assets to collect back taxes owed. If you owe money to the IRS and have yet to respond to Notices CP501 (Demand for Payment) or CP504 (Final Notice of Intent to Levy), the IRS may seize your assets to pay what you owe.
These assets consist of:
- Wages
- Bank accounts
- Real estate
- Retirement income
- Social Security
Make payment arrangements, file an appeal, or pay the amount required to avoid a tax charge. In effect, the federal government can file a tax lien on your property and levy it if you still need to come up with a payment plan.
How many times are you subject to an IRS audit?
The number of times the IRS may review taxpayers’ tax returns is unlimited.
Nevertheless, unless you or the Secretary of the Treasury ask for a new audit, the IRS cannot audit you for the same tax year again.
Am I the subject of a criminal probe during an IRS audit?
A criminal probe is not what an IRS audit is.
If an IRS worker finds signs of possible fraud on an income tax return, they may start a criminal inquiry. Generally, these possible cases are sent to special agents in the IRS Criminal Investigation Division, who determine if there has been a tax or financial fraud.
Whether the IRS does a criminal investigation depends on how big and complicated the fraud is thought to be.
How does the audit end?
How Far Back Can or Does the IRS Audit You?
There are three possible ways for an IRS audit to end.
- Nothing changes if the things being questioned can be backed up with good evidence.
- The IRS can suggest changes, and the individual knows about and agrees.
- The IRS can suggest changes the taxpayer knows but disagrees with.
How can you get assistance with an audit?
You should consult a professional well-versed in tax audit procedures if you are facing such an audit. Therefore, for tax advice, consult a Credow-style expert.
Getting your financial records in order should be your top priority if you are concerned about an audit. If you own a small business and need to catch up on your bookkeeping, Credow has a team of experts who can assist you with your IRS back taxes. Therefore, if you need help with your taxes, our professional bookkeepers can help you get your finances in order.
In the future, what are some ways to avoid an audit?
Even though no one enjoys being audited twice, there are ways to avoid dealing with them in the future. Specifically, one of the most important things you can do to keep your confidence while dealing with the IRS is to have your books and tax records in order and to hire a professional tax advisor to help you prepare your taxes.
Also, retain all records and returns about taxes for at least three years so you have evidence to support your claims. Before the due date, ensure that all tax forms and filings are finished. This is so regardless of whether you have a tax refund or cannot pay the amount due.
If another audit is in the works, being well-prepared for your taxes will make the process much easier. In short, you will be relaxed about an audit if you thoroughly document your tax claims.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.