How Soon After Filing Does the IRS Audit?
Learn when the IRS typically initiates tax audits, the factors that prompt review, and what to expect in the process.
The Internal Revenue Service (IRS) conducts audits to ensure the accuracy of tax returns and compliance with tax laws. While audits are a normal part of the tax system, they can understandably cause apprehension for taxpayers. Understanding the various aspects of IRS audits, from their timelines to the reasons they occur and the process involved, can help alleviate some of this concern.
Understanding IRS Audits and Their Timelines
An IRS audit involves a review or examination of an individual’s or organization’s financial information and accounts to verify that income, deductions, and credits are reported correctly and that the proper amount of tax is paid. The time frame within which the IRS can initiate an audit is primarily governed by the statute of limitations. For most tax returns, the IRS generally has three years from the later of the tax return’s due date or the date it was filed to conduct an audit. If a return is filed early, the three-year period begins on the tax return’s due date.
There are, however, important exceptions that can extend this general three-year period. If a taxpayer substantially understates their gross income by more than 25%, the IRS has up to six years to initiate an audit. For instance, if an individual earned $200,000 but only reported $140,000, the omitted income exceeds 25%, triggering the six-year limitation.
In cases of fraudulent returns or if a tax return is never filed, there is no statute of limitations, meaning the IRS can pursue an audit or assess taxes at any time. This allows the agency to go back indefinitely. The types of audits range from correspondence audits, which are typically conducted by mail for specific issues, to more comprehensive office audits conducted at an IRS office, and field audits where an IRS agent visits the taxpayer’s home or business.
Common Reasons for IRS Audits
Audits are often triggered by discrepancies or unusual patterns on a tax return when compared to national averages or information reported by third parties. One of the most straightforward audit triggers is failing to report all taxable income, as the IRS receives copies of income-related forms like W-2s and 1099s from employers and financial institutions. If the income reported by a taxpayer does not match the information the IRS has on file, it can lead to an inquiry.
Claiming excessive or questionable deductions can also draw IRS scrutiny. For example, if deductions appear significantly larger than what is typical for a taxpayer’s income level or industry, it may raise a red flag. Large charitable contributions, especially without proper documentation or when disproportionate to income, are frequently examined.
Certain tax credits, such as the Earned Income Tax Credit (EITC), are also identified as common audit triggers due to a higher rate of errors or fraudulent claims. While taxpayers should claim all eligible deductions and credits, it is crucial to have accurate records and documentation to support all claims made on a tax return. Mathematical errors on a return, even if unintentional, can also lead to increased scrutiny.
The IRS Audit Process
Once an audit is initiated, the IRS typically notifies the taxpayer by mail, specifying the tax year(s) under review and the type of audit. This initial notification often comes in the form of a letter. The letter will provide instructions on how to respond and a deadline.
During the audit, the IRS auditor will request documentation and explanations to support the items under review. Taxpayers are expected to cooperate by providing the requested information in a timely and organized manner. The audit examination can involve an initial review, followed by requests for additional documentation or clarification. Taxpayers have rights during this process, including the right to representation by a tax professional and the right to appeal if they disagree with the findings.
An audit can conclude in several ways. If the IRS finds no issues, it results in a “no change” audit, meaning the return is accepted as filed. If adjustments are proposed, the taxpayer can agree with the findings and pay any additional tax, interest, and applicable penalties. If the taxpayer disagrees with the audit findings, they have the right to appeal the decision within the IRS.