It’s a moment every taxpayer dreads – getting a notice from the IRS that you’re being audited. Whether your taxes are error-free, or you’ve fudged a deduction or two, dealing with an IRS audit is scary and nerve-wracking.
Curious how far back the IRS can go into your financial history when they perform an audit? Keep reading for more details.
The short answer is that it depends on what the IRS finds during the initial audit. There are several relevant timeframes to be aware of.
In general, the IRS is limited to examining the past three years of tax returns during an audit, but the IRS can go back even farther in the following circumstances:
– If the IRS finds an error during an audit, the agency can go back six years. Technically, they can go back further, but anything beyond six years is rare.
– In some circumstances, there is no time limit for an audit, and the IRS can go back as far as they want. An example of this scenario is a failure to file a Form 3520, which is related to transactions and gifts from a foreign person or trust.
– If you either failed to file a return or did not sign it, there is no statute of limitations, and the IRS can go back indefinitely.
Besides getting information about how far back an IRS audit can go, other common questions include:
Yes. Even though you can’t be audited twice for the same year’s tax returns, there is no law prohibiting the IRS from auditing you over consecutive years.
If you have failed to file taxes or purposely defrauded the government, the IRS is not bound by any time restrictions in deciding how far back to dig into your financial records. In other words, there is no statute of limitations.
It’s natural to feel nervous about an IRS audit, and some audits are more stress-inducing than others. In some cases, you won’t ever meet in person with the auditor. Instead, you’ll correspond via mail and mail your financial records.
Other times, you might meet face-to-face with the IRS representative. The meeting may occur either in a local field office or at your place of business, and you’ll be interviewed about your finances. The process can take anywhere from several days to a couple of years, depending on the complexity of your tax return.
For the most part, audits are random, and they’re extremely rare for individuals earning less than $200,000. Less than 1% of earners in this bracket have their returns audited. As incomes rise, the chances of an audit also increase. For example, returns with income of over $1 million are audited up to 10% of the time.
What triggers an IRS audit can change from year to year, but some factors remain constant. Mathematical errors, disproportionate tax deductions, claiming your hobby as a business, and abusing home office deductions are red flags. In 2022, cryptocurrency transactions and unemployment income may cause the IRS to take a closer look at your tax return. For more details on audit triggers in 2022, check out our recent blog post.
Even if you have your books in perfect order, an IRS audit is still possible. If you are notified that an audit is imminent, the team of tax professionals at Levy & Associates Tax Consultants can help. Call us at (800) TAX-LEVY to schedule a free consultation.
Levy & Associates is available for free initial consultations. We’re happy to answer any questions you have about the audit process or address any concerns about your specific situation.
There’s never a good time to be audited, and the time-consuming process will take away from your business or family if you try to face it alone. Let us handle and coordinate communication, so you can return to your daily life.