The Internal Revenue Service (IRS) is responsible for ensuring that taxpayers comply with tax laws and regulations. One way they do this is through audits, which involve a review of a taxpayer’s financial records and tax returns to ensure accuracy and completeness. It’s crucial for taxpayers to comprehend the internal workings of IRS audits and their retrospective reach, as such knowledge is key in abstaining from hefty penalties or fines due to mispayment or nonpayment of taxes.
This article will provide a comprehensive guide on how far back the IRS can audit you, what triggers an audit, what happens during an audit, and the consequences of failing an audit. Fortunately, there are companies such as Ideal Tax that offer audit assistance. Make sure you do your research before proceeding with any of these tax relief companies.
How Long Does The IRS Have To Audit Your Tax Return?
The statute of limitations is the amount of time the IRS has to audit a tax return and assess any additional taxes, penalties, or interest. Generally, the statute of limitations for tax audits is three years from the date a tax return was filed or its due date, whichever is later. However, there are some exceptions to this rule.
For example, if you fail to report more than 25% of your gross income on a tax return, the statute of limitations increases to six years. Additionally, if you file a fraudulent tax return or don’t file one at all, there is no statute of limitations – meaning the IRS can audit you at any time.
Different types of tax returns and situations also have different time frames for which the IRS can conduct an audit. For example, employment tax returns can be audited for up to four years after they are due or filed (whichever is later), while estate and gift tax returns can be audited for up to six years.
It’s important to note that even if the statute of limitations has expired, it’s still possible for the IRS to audit you in certain circumstances. For instance, if they suspect you committed fraud or failed to report income intentionally, they may still initiate an audit beyond the statute of limitations.
What Triggers An IRS Audit?
While not everyone who files a tax return will be audited, there are certain red flags that may increase your chances of being selected for an audit by the IRS. Here are some common triggers:
1. High Income: As the IRS tends to prioritize higher-income taxpayers, those who make a substantial salary may be more likely subjected to an audit.
2. Unreported Income: Failing to report all of your income, whether intentionally or unintentionally, can raise suspicion and trigger an audit.
3. Large Deductions: Taking large deductions relative to your income can also raise red flags for the IRS, especially if they seem out of line with what’s typical for your industry or profession.
4. Home Office Deductions: Claiming home office deductions can also trigger an audit as it’s a commonly abused deduction.
5. Cryptocurrency Transactions: The IRS has recently been cracking down on cryptocurrency transactions and failing to report these transactions accurately can lead to an audit.
To avoid triggering an audit, ensure you’re reporting all of your income accurately and keeping detailed records of any deductions you claim. It’s also important to be honest on your tax return and not try to hide anything from the IRS.
What Happens During An IRS Audit?
During an IRS audit, the agency will review your tax return to ensure that everything is accurate and complete. Here’s an overview of what you can expect during the audit process:
1. Notification: The IRS will notify you by mail or phone that you’ve been selected for an audit.
2. Preparation: You’ll need to gather all of your financial records and prepare to answer questions about your tax return.
3. Meeting: Depending on the type of audit, you may meet with the auditor in person at their office or yours, or it may be conducted through mail correspondence.
4. Review: The auditor will review your financial records and ask questions about specific items on your tax return to determine if there are any discrepancies.
5. Findings: After reviewing your records, the auditor will provide a report outlining any changes or adjustments that they believe should be made to your tax return.
There are three types of audits – mail audits, office audits, and field audits. A mail audit is conducted through written correspondence and usually focuses on a specific item on your tax return. An office audit requires you to visit an IRS office and bring along specific documents related to the audit. A field audit is typically more complex and involves an auditor visiting your home or place of business to review financial records in person.
As a taxpayer, you have certain rights during an audit, including the right to representation by a qualified professional, the right to appeal any decisions made by the auditor, and the right to privacy regarding personal financial information.
Consequences Of Failing An IRS Audit
Ignoring the IRS audit can lead to disastrous consequences, including hefty fines for failing to pay your taxes on time. Here are some potential consequences you should be aware of:
- Penalties and Fines: If the auditor finds that you owe additional taxes, you may be subject to penalties and fines for underpayment or non-payment of taxes. These penalties can add up quickly and make catching up on your tax payments difficult.
- Interest Charges: In addition to penalties and fines, the IRS will charge interest on unpaid taxes. This interest can accrue over time, making paying off your tax debt even more difficult.
- Loss of Deductions: If the auditor finds that you’ve claimed deductions that you’re not entitled to, they may disallow those deductions in future years.
- Further Audits: Failing an audit can increase your chances of being audited again in the future, as the IRS may view you as a higher-risk taxpayer.
In extreme cases, failing an audit can lead to criminal charges such as tax evasion or fraud. However, these cases are relatively rare and usually only apply to taxpayers who have intentionally misrepresented their income or deductions.
To avoid these consequences, it’s important to be honest on your tax return and keep accurate records of all financial transactions throughout the year. If you do receive notice of an audit, it’s important to cooperate with the auditor and provide all requested information in a timely manner.
It’s important to note that the IRS can go backup to three years in auditing tax returns, but may go further if fraud or intentional misrepresentation is suspected. Being informed and proactive about compliance can help avoid stress and financial burden.
An audit should not be taken lightly and professional help is recommended if you’re selected for one. By understanding the process and your rights, you can become better equipped to handle an audit. Additionally, ensuring that all of your information is accurate and up-to-date can help prevent any unwelcome surprises with the IRS.