How Long Does the IRS Have to Conduct an Audit?

Many taxpayers worry greatly about the risk of facing a tax audit. And, a lot of them breathe a sigh of relief once their taxes are filed and they don’t immediately receive correspondence from the IRS.

Unfortunately, though, these individuals may be ceasing their worries prematurely. The IRS typically has up to three years after a return is filed to decide it wants to audit it.  

How Are Those Three Years Calculated?  

So, you may be wondering, how does the IRS calculate the three-year audit window? Typically, it’s based on the day that your taxes were originally due. Thus, if you file late without a formal extension, you don’t get to just count based on the day you filed. With a formal extension, on the other hand, the audit deadline does move to your approved, extended filing date unless you file before that date. In that case, your audit deadline is based on the day you actually filed.  

Omissions of Income  

If three years, as calculated by the IRS, have passed since you filed a tax return you’re worried about, you may be breathing a little easier. But, don’t breathe too easy just yet!If you omitted income on the return in question and if that income is more than 25% of what you reported, the IRS has longer to audit you. In these instances, it doubles its deadline to a full six years.  

Undisclosed Foreign Assets  

The extended, six-year deadline also applies to tax years in which the taxpayer failed to report foreign financial assets of over $5000.  

Fraudulent Returns  

Finally, if you filed a return that was fraudulent, according to the IRS, there is no statute of limitations on how long it has to conduct an audit.   And, since the IRS gets to determine what constitutes a “fraudulent” return or not, you are basically never in the clear if you’ve been dishonest on a return. 

The Bottom Line  

The IRS holds a lot of power and jurisdiction when it comes to audits. So, even if you think you might be “safe,” you can never fully know for sure. That’s why it’s best to file all returns correctly and thoroughly, ideally with the help of a professional, and also to have a tax expert on your side who can assist you if the IRS does decide that you’re due for an audit.

Understanding the Different Types of Audit

Most taxpayers dread the very thought of having to undergo a tax audit. In fact, they dread it so much that they don’t even realize that all audits are not created equally. In actuality, however, there are many different types of audits. And, while, hopefully, you will never have go undergo any of them, it’s still important to understand the different types of audits and how to best handle them.  

Correspondence Audits

The most common type of audit is a simple correspondence audit. These are fairly stress-free since you handle them, at least if all goes well, via mail.

The IRS will simply request to see copies of your receipts and/or other documentation, which you mail in. After reviewing the documents, the IRS agent will either approve your return as is or make any necessary adjustments, along with penalties if they apply.

While undergoing a correspondence audit is not ideal, it’s usually pretty simple and straightforward and nothing to worry about as long as you have all of your documentation in order.

Office Audits

Office audits are very similar to correspondence audits. The only difference is that, instead of mailing in your documentation, you are asked to bring it to an IRS office in your area.

This can be a bit more nervewracking than a mail or correspondence audit, but it’s still manageable if you have your documentation together. You’ll also be glad to know that these audits are fairly uncommon, so it’s not likely you’ll have to go through this hassle.

Field Audits

Perhaps the most nervewracking and most serious kind of audit is when an IRS agent visits you in your home or office. You should still be prepared with documentation, but know that agents don’t typically pursue this type of audit unless serious discrepancies are suspected.

If you have been asked to have a field audit or, really, any type of audit, it’s always a good idea to work closely with your financial adviser to prepare and to reconcile any discrepancies or problems if they exist. Of course, if you work closely with a financial professional from the start, you can greatly reduce your risk of any type of audit happening in the first place!

Tax Mistakes that Can Force an Audit

No one wants to face a tax audit. Even if you’ve tried your best to be honest and to keep everything on the “up and up,” it is still a stressful experience that most of us just don’t have time for.

And, while there is no surefire way to protect yourself from an audit (some of them just happen randomly), there are things that you can do to greatly reduce your chances of being audited.

To begin with, make sure you don’t commit any of the “major mistakes” that can easily end in an audit.

Hiring An Unscrupulous Tax Preparer

Many people try to protect themselves from errors and auditing by hiring a professional to prepare their tax returns.

And, while this is usually a smart choice, you do have to be careful to hire someone who is honest, scrupulous, and who knows what they’re doing.

If you hire the wrong person, meaning someone inexperienced and prone to mistakes or, worse yet, someone who lies to get higher returns for his clients, you could find yourself in a bad situation.

If the IRS notices that a particular preparer is making a lot of mistakes or being dishonest, it may decide to audit every person who has had a return filed by that individual. Obviously, you do not want your name on that kind of list, so choose your preparer wisely.

Filing the Wrong Forms

One easy way to end up getting audited is if you file the wrong tax forms for your situation. When you make this mistake, the IRS may wonder what else you’ve done wrong and decide to investigate with an audit.

Of course, some forms, such as a Schedule C, which is required for businesses, just increase your chances of an audit no matter what. In these cases, it’s important to work with a knowledgeable tax professional to ensure you’re filing these forms correctly and that you have protection and an advisee you can turn to if an audit does occur.

Taking Excessive Deductions or Credits

Finally, deductions and credits are wonderful things that can end up saving you a lot of money on your taxes.

With that said, though, if you take a lot of them, this could trigger an audit, particularly if the deductions and credits look a little suspicious, like when you’ve been “entertaining” one too many clients.

By all means, take the deductions and credits you are eligible for, but do so honestly and make sure you keep careful, documented proof of the fact that you were allowed to take them.

If you can follow these tips, you can reduce your chances of being audited or at least survive if an audit does happen to you.

Avoiding the Dreaded Audit

Tax audits are one of the things that American taxpayers dread and fear the most. Even if you’ve been honest, the thought of someone going through your finances with a fine-toothed comb, just looking for mistakes for which to penalize you, is more than a little scary.   

And, while there’s no foolproof way to avoid an audit- sometimes, they just happen- there definitely are things you can do to reduce your chances of being selected for an audit. The IRS has certain “red flags” that it looks for, flags that, if it spots them, urges officials to pay more attention to your tax forms and filings.

By making yourself aware of these red flags and ensuring that none of them apply to you, you can greatly reduce your risk of getting audited.

Unreported Income

One of the easiest ways to find yourself facing an audit is if you have unreported income. If you’re getting paid from any organization or individual, expect that income to get reported back to the IRS.

The IRS will match up any reported income to your tax return. And, if your tax return doesn’t contain all income you’ve earned, you’re practically begging for an audit. In other words, make sure your records and the income you’re reporting matches up with all of the documentation the IRS has on you!

Too Much Money

If you’re like most Americans, then you probably think there’s no such thing as “too much money.” As far as the IRS is concerned, though, there definitely can be. If you’re earning more than $200,000, you have a much greater chance of getting audited than someone who earns less.

That may not be fair, but it’s true. The IRS knows that people who earn higher amounts of money than average are likely to owe more in taxes, thus equaling a greater profit for the IRS, and that they’re more likely to make “mistakes” on their tax forms.

So, if you earn above the $200,000 mark, you’ll definitely want to be extra careful to report everything correctly. That way, if you do get marked for an audit, everything will be on the up and up, keeping you out of trouble.

Not Reporting Foreign Assets

Finally, if you have foreign assets, be aware that, these days, you are required to report them, not just to signify that you have them by checking a box, which is the way things used to work.

The rule of thumb is that you have to report any assets worth $50,000 or more on Form 8938. If you don’t, the IRS will find out about it due to required reporting from foreign agencies, and when it does find out, it’s likely to go after you with an audit.

As you can see, there are all kinds of behaviors that put you at risk for an audit. Reduce your risk by being honest, making smart choices, and working with a knowledgeable tax adviser that you can trust.

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Facing an IRS Audit

Everyone dreads the thought of being audited - of having their taxes gone over with a fine-tooth comb by the IRS. Unfortunately, though, audits do happen, and they can happen to just about anyone. If you do get the dreaded news that you’ve been chosen for an audit (lucky you, right?), it’s important that you do the right things to avoid further trouble.   

Step #1: Check it Out

Before you panic or start trying to find all your tax information, take a deep breath and make sure the audit is for real. Sadly, a lot of fraudsters are adept at getting your personal information by claiming to be conducting an audit. An audit is only the real deal if the notice comes from the IRS in the form of a typed, official letter. Even then, it’s a good idea to contact the IRS or your tax advisor to make sure it’s legit- definitely check it out before handing over any tax or personal information!

Step #2: Gather Your Materials

If it does turn out that the audit is for real, your next step should be to carefully read the audit letter and then to gather all the forms it asks of you. Having these ready to go at the time of the audit will help things to go a lot more smoothly. More often than not, audits are being made as the result of a simple error, and providing the right information and getting the error sorted out may be all it takes to get life back to normal and the audit over with. Just do as the IRS asks to the best of your ability, and as long as you haven’t outright and obviously lied, you should be okay.

Step #3: Get Help!

Finally, don’t hesitate to ask for professional help if, at any point during the audit, you start to feel overwhelmed or confused. Professionals have dealt with the IRS before and can provide comfort, assurance, and advice during this troubling time. As long as you get the right help, if needed, and do what is asked of you, everything should be okay!

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Are You Asking for an Audit?

An audit, which involves having your finances gone over with a fine-toothed comb, isn’t something that anyone wants. In fact, it’s something that a lot of people dread. If you’re like most people and want to avoid an audit, don’t ask for one! We know you wouldn’t actually ask, but certain things you do are practically a recipe for an audit, so, if you do these things, you might as well! By avoiding the audit “red flags,” you can greatly reduce your risk of being one of the unlucky taxpayers.  

A Drastic Change in Your Income

If your income suddenly increases or decreases, this could spell trouble for you. The IRS typically takes notice of big changes in income, and if it has reason to believe you’re under-reporting income or that you have done so in the past, an audit is probably on the way.

There’s not much you can do about a major change in your income. If there has been a change, just do your reporting extra carefully in the coming tax year and make sure the change is easily explainable.

Lots of Business Expenses

Plenty of people have legitimate business expenses they can claim. However, some business expenses can look fishy to the IRS. This is especially true for those who work for themselves, particularly when they have lots of business-related deductions without bringing in a lot of bank.

Large changes in the amount of business expenses reported or business expenses that seem odd, like a trip to a popular vacation destination, also tend to raise red flags. The best you can do is to be as honest as possible, to never take deductions that aren’t 100% legitimate, and to file away all your receipts, just in case.

Greater-than-Usual Generosity

Giving to charity is a wonderful thing. Unfortunately, too much giving, especially if it’s not typical for you, can look bad. Each year, a great many people exaggerate their charitable donations in order to receive a nice tax write-off. Even if you wouldn’t do something like that, a large spike in your giving can raise suspicions.

The answer isn’t to stop giving or to stop claiming your donations. It’s to gradually increase the amount you give, since that will spike fewer suspicions than a sudden, drastic change. Also, keep all your receipts and records handy as proof.

In fact, careful record-keeping really is the smartest thing you can do in all aspects of your finances. That’s because, even if you follow all of these tips to a tee, audits still happen. They can happen to anyone at any time, so, even if you’re doing everything right, it’s always best to be prepared.

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Tips to Avoid an Audit

The tax audit, a thorough investigation of one’s finances, is every taxpayer’s worst nightmare. While, sometimes, an audit “victim” is just chosen at random, more often than not, people who are audited go through the process because they raised some kind of “red flag” with the IRS. Therefore, you can greatly reduce your chances of going through an audit by avoiding any actions or behaviors that could be construed as suspicious. To help you out, here are a few things to avoid if you don’t want to be audited.

Exaggerating Charitable Contributions                                          

It’s great to be a do-gooder, especially because your contributions can pay off big time in terms of tax write-offs. However, when reporting charitable contributions, you always want to be completely honest and transparent about what and how much you gave.

The IRS has a formula it uses to determine the average charitable donation amount for people of a certain income. When you report going above and beyond that amount, the IRS is more wont to check you out and make sure you’re being honest.

If you are legitimately someone who gives beyond your means, just make sure you keep receipts, donation slips, or other proof of your contributions.

Random Deductions

Deductions are completely legal and allowed under tax law. Some deductions, such as home office deductions, are extremely common. However, there are also those random deductions like botox injections so you could stop your profuse sweating, that make the IRS (and everybody else) go “huh?”

Don’t try to get cheeky with your deductions by using euphemisms or just flat out being dishonest. Only claim legitimate deductions and be transparent about why you’re claiming them. Otherwise, you could find yourself not only getting audited but also facing potential fines, fees, and even jail time for fraud.

Overseas Accounts

You’ve probably heard about how people avoid paying taxes by having “Swiss bank accounts” or other overseas funds. And, if you have a legitimate, provable reason to have funds overseas, that’s fine. If you don’t however, know that hoarding money in another country gives the IRS a lot of pause....and plenty of reason to audit you. That’s not to say you can’t keep money overseas, for whatever reason, but just make sure you disclose it.

As you can see, it’s all too easy to alert the IRS to something potentially risky going on. And, even if you’re an honest person, this could mean a pesky audit for you. To avoid auditing, follow these tips and consider the possibility of getting an accountant to help you eliminate “warning signs” from your financial life.

SM Entertainment Pays Big Due to Tax Audit

Many businesses get away with faulty tax procedures for years. Unfortunately for these companies, however, the truth has a way of coming out in the end. Take SM Entertainment, for example. This South Korean entertainment company was suspected by the Seoul Regional National Tax Service, comparable to the IRS in America, of not filing taxes on much of the money earned from clients’ overseas promotions.  

Well, the result was a tax audit. That’s also the usual result in America when a company or person falls under suspicion for some kind of tax fraud or dishonesty. The audit resulted in the company having to pay back around 10 million United States dollars.

Even if you’re not dealing in that kind of money, it’s still important to make sure all of your tax-related matters are on the “up and up.” If they’re not and an audit is conducted, you could end up in big trouble. Don’t make a huge mistake; let a professional handle your taxes and your financial records for you.

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How to Avoid a Tax Audit

No one wants to go through a tax audit, and fortunately, there are some simple things you can do to reduce your chances of having to go through this dreaded process.   

For starters, make sure you don’t make any errors when you file your tax return. Yes, that’s easier said than done, but it’s so important to file correctly. Errors are an easy way to get the IRS super-interested in your taxes and in what other “mistakes” you might have made. Get all of your forms together before you file and check and double check to make sure you’ve listed dependents and exemptions properly.

Also, you’ll definitely want to remember to include all of the income you received from all of your jobs. Remember, the IRS has copies of every single 1099 and W-2 with your name on it, so you don’t want to leave anyone or any income out.

Finally, if you truly want to reduce your chances of an audit, hire a trustworthy accountant to take care of all your tax matters for you. There are plenty of good accountants and the right one can make it easy to avoid an audit.

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Lying to the IRS: Just Don't Do It

When tax season rolls around, everyone hopes to get a refund and to avoid paying taxes. Unfortunately, however, that outcome just isn’t reality for many people. While paying taxes can be frustrating, you should know that engaging in any kind of fraud or lying when it comes to the IRS just isn’t worth it!

Most people who commit tax fraud don’t do so in big ways; they just commit “little” frauds, such as claiming unearned income or making up expenses that don’t really exist. Some people will even fib about the number of dependents they currently have. While some of these scams might work for a while, they will likely results of that tax audit aren’t favorable, you could end up in serious legal and financial trouble.

eventually lead to a tax audit, and if the

Get the most out of the tax filing process the legal way by allowing a qualified accountant to assist you. The accountants at Susan S. Lewis, Ltd. of Naperville are trained to make your income tax filing as beneficial to you as possible.

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