How Many Years Can You Be Audited?
The IRS usually grants a statute of limitations of a period of up to three year in which to initiate an audit of a taxpayer.
The three-year limit starts from the later of:
- The date of which the return was originally due. This is usually when taxes are due on April 15.
- The date which the return was originally filed. If the taxpayer the taxpayer obtained a filing extension, the filing date maybe has been up to six months later than original April due date without the return being considered delinquent.
There are some situations in which that the three-year statute of limitations is extended, granting the IRS additional time to audit certain taxpayers. Here are major exceptions to the three-year limit:
Up to Six Years – The IRS may have up to six years in which to conduct an audit in cases where a tax return indicates a “substantial understatement of income,” which usually means an understatement of approximately 25% or more. Taxpayers must report and pay taxes on taxable income, making the willful failure to report income an offense punishable by fines, restitution, and prison time.
No Time Limit – Sometimes, no statute of limitations applies, giving the IRS unlimited time in which to conduct an audit. This is a worst-case scenario for any taxpayer and might require aggressive legal representation imperative. The IRS may audit taxpayers with no time limit in the following scenarios:
- The taxpayer does not file a tax return. If a taxpayer is not ready to file by Tax Day, the appropriate response is to obtain a time extension.
- The taxpayer files a fraudulent tax return. Filing a fraudulent tax return is a felony. Taxpayers who commit this offense may be fined up to $100,000 and/or imprisoned for up to three years.
Voluntary Extensions – Depending on the circumstances, the IRS may ask a taxpayer to voluntarily grant a time extension on a case-by-case basis. Keep in mind that, with some exceptions, extensions are generally permanent if granted.
If you’re interested in more information about IRS audits, you might also want to read:
NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.
7 Reasons the IRS Might Audit You
An audit is simply a way for the IRS or state tax authority to double-check your numbers and look deeper into discrepancies. The IRS will audit a taxpayer with suspicious financial and tax activity.
While the IRS doesn’t specifically say what will be a red flag when choosing to audit someone, there are some things that may potentially be seen as a red flag:
1) Too Many Charitable Donations
Making significant charitable donations will make you eligible for some substantial deductions during tax season. However, if you don’t have the documentation to support the validity of your contribution, don’t claim. For example, the IRS is going to notice a tax return that claims $10,000 in charitable deductions when that tax payer’s annual salary was only $40,000.
2) Failing to Report Part of Your Income
Form 1099 reports nonwage income you get from things like freelance, stock dividends and interest.
If you have a day job and pick up freelance work on the side, you might be tempted to only submit your W-2 form from your day job and keep your freelance writing income on your Form 1099 a secret.
Well, that is not a great idea because the IRS most likely already knows about that freelance income listed on your Form 1099 because the company you worked for probably sent in a copy of that Form 1099 to claim the work you did for them.
3) Claiming Too Many Work Expenses
In order for a deduction to be eligible, it must be ordinary and necessary to your line of work. A professional income who sells their art for income could claim paint and paintbrushes because those purchases were ordinary and necessary. However, a lawyer who pains for fun and does not make income from their work, can’t make the same claim to deduct the expenses of their art supplies.
When claiming an expense for your career consider if the purchase was absolutely necessary for you to perform your work duties.
4) Mathematical Errors
Making errors on your tax return could cause the IRS to audit you. Anyone who files taxes should avoid mistakes because you could face penalties whether those mistakes were intentional or not. If you’re doing your own taxes, double and triple check your numbers. If your math skills are lacking, perhaps consider using a tax preparation software or working a tax preparer to help you avoid costly errors.
5) Too Many Losses on a Schedule C
If you’re self-employed, you might be tempted to hide income by filing personal expenses as business expenses. Before you write off your new skis, consider that IRS might consider too many reported losses suspicious. The IRS will wonder how you’re keeping your business afloat.
6) Your Numbers Are Too Neat and Round
The numbers on your 1040 form and supporting documents will not be simple and in intervals of $100. Be precise and avoid estimating when you’re making your calculations. Round to the nearest dollar but no the nearest hundred. Say you’re claiming an expense that is $495.15, round that number to $495, not $500. An even $500 is something the IRS will likely ask for proof of.
7) Home Office Deductions
A deduction that is often subject to fraud is home office deductions.
The IRS has specific qualifications for home office deductions for people who use part of their home regularly for your trade or business. So, a home office can qualify, if you use it for work and work only.
Give honest measurements when you report part of your home used for strictly business operations Answering emails from your couch in your living room, in front of a big-screen TV does not count as a home office.
What Happens When the IRS Audits You?
There are different types of tax audits and each has their own requirements. Understanding how you are being audited will help you know what documents to gather, where to send them and whether you need a tax lawyer.
Correspondence Audit: the IRS is asking for more details concerning part of your tax return and will generally seek receipts, checks and similar documentation.
Office Audit: the IRS will ask you to bring specific documentation into your local IRS office where the audit will be conducted.
Field Audit: an IRS agent comes to your place of business to conduct the audit in person.
It is highly recommended that you have a tax lawyer present for both Field Audits and Office Audits.
Gather Your Documents
Once you know what kind of audit you are experiencing, you can start going through your records for the relevant receipts and documents you need. Make sure to never send in your original documents or only copy, and never send more than the requested documents. If you can’t find requested documentation, request duplicates immediately. The IRS auditor won’t accept the excuse that records are missing or lost.
Good organization of your documents will show your auditor that you’re a responsible taxpayer and may result in the agent minimizing the scope of their investigation. So, organize your copies and originals, especially if you are having an in-person audit.
Get A Tax Lawyer
When you hear that you’re being audited contact your tax preparer or advisor who prepared your return right away. They can explain the audit process and help you get ready. If you’re worried about your audit or have a field auditor coming to your workplace, it is recommended that you hire a professional tax lawyer.