The government will impose monetary obligations to the citizens and business owners of the country to raise funds for public and social projects. Taxes are used to meet the needs and demands of the society for health, like medical research, healthcare, social security, and many others. Besides that, these funds will also go to the educational needs of the residents to acquire knowledge and skills for survival and progress.
Moreover, the government will also distribute the collected taxes to different projects, like unemployment and illness benefits, scientific research, pensions, roads and highways, infrastructure, and many others. These are examples of projects where the taxes are used that everyone will benefit and enjoy. That’s why it’s also every citizen’s responsibility to process tax returns every year.
However, you may all know that there are also some who don’t pay their legal obligations for various reasons or commit any fraudulent activities to avoid their tax liability. Because of that, the Internal Revenue Service will make sure that every taxpayer will file their returns on time. Otherwise, they’ll proceed with the necessary legal actions with corresponding penalties and consequences.
That’s why if the Internal Revenue Service suspects taxpayers who don’t comply with the tax laws in the country, they put those accounts on audit for in-depth review and investigation. Hence, if you want to know more about the IRS audit, your rights, statutes of limitation, and many other things related to putting a taxpayer’s account on audit, you have to check the complete details below.
What is an IRS Audit?
An IRS audit is to make sure that all of the information you reported based on the form and documents you submitted is true and correct. That’s why the IRS will conduct a thorough review and investigation of your account and financial information to verify the return you processed is accurate, and you followed everything according to the tax laws in the country.
What Triggers an IRS Audit?
If the IRS is conducting a tax audit, it doesn’t always mean that there’s a problem or issue. In fact, the IRS has various ways of selecting an account to audit. The first one is when they use the statistical formula during the selection process. After that, it’s random, and the IRS will compare the taxes of a particular account with others of similar or the same tax returns.
Then, the next one is to select a return with issues with other accounts. It can be investors, corporations, business partnerships, and many others. Besides that, the selection for these accounts for audit is also random. Hence, if there are some inconsistencies, inaccuracies, and something questionable in the information, that’s what the IRS audit triggers in 2021, resulting in further investigation and review.
What does the IRS look at during an audit?
When the IRS is auditing your account, they’re verifying every information you submitted to see if everything is accurate. You’ll also provide them with the necessary documents and other files based on the written request they’ll be sending you. It includes receipts, checks, bills, loan agreements, legal papers, and many others.
How will I know I am being audited by the IRS?
The IRS will contact you via mail or in person when your account has been selected for a tax audit. They’ll do it by conducting a personal one-on-one interview or through the mail to get all of the information they need. Besides that, if it’s an interview, they can do it in the taxpayer’s residence or the office of the IRS or the accountant. But, don’t worry because the IRS will send you a letter with all of the details and instructions in processing the tax audit.
Who and what does the IRS audit the most?
As previously mentioned, the IRS uses different ways to select an account for a tax audit. Hence, if yours will be chosen, and they’ve noticed inaccuracies, inconsistencies, and questionable information from the form and documents you submitted, they would conduct further review and investigation.
Besides that, according to the IRS data of audits, the rich and the poor taxpayers tend to get more attention from the IRS. For example, those who receive an annual income of less than $25,000 have 0.69% of the audit rate, which is higher than the overall audit rate by 50%. It also shows that these taxpayers in this particular income range tend to get audited more than the other group. On the other hand, those earning annually with more than half a million US dollars or at least ten million US dollars have a 6% audit rate, which is the highest percentage among all other groups.
However, according to the IRS data, the agency is now working with fewer employees, and in recent years, its workforce has dropped tremendously. As a result, the IRS is now auditing a few taxpayers, and the audit rates of all income groups are also declining.
How far back can the IRS audit personal returns?
The IRS will audit returns for three years according to the federal statute of limitations. However, the agency can extend it up to six years or more depending on the case and other circumstances that may happen along the way of the process. Hence, if you want to know how far back can the IRS audit an individual, check the details below.
Auditing an Account for Three Years
According to the federal statute of limitations, the IRS has up to three years to conduct a tax audit for your account. So, for example, if you file your return today, the IRS audit period will end three years later on the same date. However, if you’ve submitted your return a few days before the stipulated date on the form, the span of three years will be based on the said due date and not on the date you filed it.
Moreover, if the IRS gives you an extension, which is usually six months after the original due date, the three-year IRS audits will be completed three years after the new provided due date. On the other hand, if you filed your return late and you didn’t receive any extension from the IRS, the counting of three years will be based on the late filing date.
Auditing an Account for Six Years
Auditing a taxpayer’s account may take up to six years, depending on different circumstances and particular cases. For example, if the IRS finds out that there’s 25% or more understatement in your taxable income, or if they’ll identify specific items on the returns you filed to have the same percentage of understatement, the agency will decide to extend the audit up to six years. Moreover, if you didn’t include $5,000 or more in your return from the income or investments offshore, it’ll also be a big reason for the IRS to make it up to six years of audit instead of three.
No Auditing Time Frame
To know how far back can the IRS audit a person, besides the two time frames of auditing a taxpayer’s account discussed above, there’s also a chance that the IRS will have no specific time limit in auditing and collecting the taxes owed. It may happen if you don’t file your return at all or if you do but don’t put your signature on it, making it an invalid return. Besides that, if you submit a fraudulent tax return, including using a fake SS number, underreporting your taxable income, and other related circumstances, the IRS will decide to audit your account with no particular time limit.
How far back can the IRS audit a deceased person?
The IRS will continue collecting taxes when a person owes some before his or her death. It’s because, after the assessment of your tax obligation, there will be a total of ten years for the CSED or the Collection Statute Expiration Date for delinquent tax returns. Moreover, the IRS may also audit the tax returns filed by the taxpayer before his or her death for up to three years. However, it may also take up to six years if the taxable income was underreported by 25% or more.
Can IRS debt be forgiven?
If you can present evidence and documents that will significantly prove your inability to settle your taxes, the IRS may forgive a particular portion of your delinquent taxes. Besides that, the IRS may give you an installment agreement, which is the specialized payment program of the agency, that allows you to have a regular payment schedule based on your capacity to pay or current financial situation.
Statutes of Limitation
The statutes of limitation refer to the particular period of time that the IRS will use to review and investigate the taxpayers’ account to ensure that all information is true and correct and collect whatever delinquent tax returns. The IRS will apply different statutes of limitations to various cases and circumstances to claim tax fraud or evasion and even collect owed taxes. Besides that, the IRS has six years before they can begin any criminal tax proceedings, according to section 6531(2) of the Tax Code in the United States.
How to Reduce Risk of an IRS Audit?
There are many ways you can reduce any risks of an IRS audit. First, make sure that you’ll add up all your taxable income accurately, submit the forms and other documents with correct information, and respond to any tax notices from third-party companies. Besides that, if you’re earning ten million US dollars or more every year, the IRS tends to go into details of your returns because they are more complicated and prone to mistakes.
That’s why you have to be mindful of your figures and prepare all documents to substantiate the data you’re going to present. Remember that a little bit of mistake or inconsistency may lead to suspicion, and, worse, your account may be subject to audit and further review.
Besides that, to protect yourself in case that the IRS will audit your account, you have to keep your records properly and orderly. It includes your returns and records for three years, receipts for major purchases, bills, deductible details, and many others. These are some examples of avoiding risks of an IRS audit. Hence, keep in mind that one of the basic rules is to comply with the tax law all the time.
IRS Audit Reconsideration
The IRS will have an audit reconsideration for reevaluating the previous audit results, depending on your case or circumstances. For example, if you have a new assessment for additional tax returns, another delinquent tax, or reversed tax credits and adjustments, the IRS may have an audit reconsideration. Besides that, if you disagree with the audit results, you can provide documents and information that weren’t added to the previous audit for reevaluation.
How to get legal help?
It’ll always be your choice whether or not you want to get help from a tax professional if the IRS is auditing you. However, many taxpayers say that it’ll be worth it to get professional help to guide you along the way. Hence, if you decide to hire one, you can have a CPA or a certified public accountant, or a tax attorney with experience in audit representation.
Moreover, you can also approach any tax software companies, which can give you audit defense as an insurance policy that requires a particular amount for payment. Hence, always remember that you have rights that you can practice when the IRS audits you for whatever reasons. It includes your right to representation and to get professional and fair treatment from the assigned auditor.
FAQs
Can the IRS audit you after three years?
Yes, the IRS can audit a taxpayer after three years, depending on the circumstances and particular cases. Hence, do you want to know how far back can the IRS do an audit? If the IRS finds out that there’s 25% or more understatement in your taxable income, or if they’ll identify particular items on the returns you filed to have the same percentage of understatement, the agency will decide to extend the statute up to six years according to the statute of limitations. Moreover, if you didn’t include $5,000 or more in your return from the income or investments offshore, it’ll also be a big reason for the IRS to make it up to six years of audit instead of three.
Can the IRS audit you two years in a row?
Yes, no particular guideline or rule prevents the IRS from putting your account on audit for two consecutive years. As long as they’ll notice some inconsistencies and inaccuracies with the information on the form and documents you submitted, the IRS won’t have any second thoughts in finding the truth and make you comply with the tax law in the country by reviewing, investigating, and auditing your account.
Can the IRS go back more than 10 years?
Yes, the IRS has an option to audit you with no specific time limit. It may happen if you’ve filed your return at all or if you do, but you didn’t sign it, making it an invalid return. Besides that, if you submit a fraudulent tax return, including underreporting your taxable income, using a fake SS number, and other related circumstances, according to the law, the IRS will decide to audit your account at no particular time limit.
Is there a time limit on IRS audits?
There are different time limits on the IRS audits, depending on your case and circumstances. Hence, do you want to know how many years back can the IRS audit? The IRS may complete it within three years, six years, and sometimes, it’ll be no particular time, especially when you’ve committed a serious tax crime that may even lead to imprisonment and penalties.
What triggers an IRS audit?
Suppose the IRS will notice some inconsistencies, inaccuracies, and something questionable in the information on the form and documents you submitted. In that case, that’s when the IRS audit triggers, resulting in further investigation and review.
Does the IRS forgive debt after 10 years?
The US government is not in the business of forgiving people for unpaid taxes, but even they have limits. The IRS has 10 years to from the date of assessment to collect the taxes owed. The date of assessment usually occurs after an audit. However, suppose you can present valid documents and evidence that will prove your inability to pay your federal taxes. In that case, the IRS may forgive you for a particular portion of your delinquent tax returns. Besides that, the IRS will also offer you options in settling your owed income tax based on your current situation.
How many years does the IRS keep records?
The IRS will try to always keep all records of taxpayers. Generally, after ten years the IRS destroys copies of the actual tax returns filed, but still maintains a recordd of the information reported on the returns. However, as a taxpayer, the length of time you need to keep your records will depend on the type of document or file and what transactions you used it for. You may need to keep those records to support the tax adjustments or credits you’re getting, the total amount of income tax, and many others. You should keep your tax records for at least three years after you file your return, but some tax advisors recommend five years.
