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IRS Audits: Timing is Everything

The IRS is powerful, but not without limit. After getting over the shock of reading “we have selected your federal income tax return for examination,” look carefully at the year or years on the audit notice.

In general, after you file a tax return, the IRS has only three years to begin and end an audit of that return. If you filed it before the due date, April 15, the three years start running from April 15. If you filed an extension to October 15, the three years start running from that date.

Introduction

If you were audited within the last two years and the IRS made no more than a thousand dollars or so in adjustments or issued a “no change” report, you should not be audited again. If you are, call the IRS and ask that the audit be canceled.

Explain that you’ve already been audited recently and that the outcome was no or minimal tax owing. If the IRS employee is not aware of the IRS policy against repeat audits, ask to speak to a manager. This might not work, but it’s worth a try.

Audit Notices for Years More Than Three Years Past

If any year on the audit notice is more than three years past, the IRS may have goofed. To check if it’s a mistake, call the IRS and ask that the audit be canceled because of the three-year rule. If you’re told that the audit is no mistake, head for a tax pro’s office pronto.

In three situations, the IRS has more than three years to complete an audit of your tax return. So, keep reading if you’re being audited for a return filed more than three years past or are worried about an audit expanding into years gone by.

  • If the IRS believes that you understated your income by 25% or more, the IRS has six years to complete an audit of your return.
  • If the IRS believes that you filed a fraudulent return, there is no time limit for auditing that return. Tax fraud is conduct meant to deceive the IRS, such as using a false Social Security number.
TIP:

A really big mistake—even a stupid one—isn’t fraud if it wasn’t deliberate. The burden of proving fraud is always on the IRS.

Thus the agency seldom audits returns after three years, even if the IRS believes that fraud is evident.

So, if the IRS just caught you doing something questionable, the IRS may expand the audit to returns filed within the last three years, but isn’t likely to go back further.

CAUTION:

If you did not file a tax return, the IRS has forever to audit you. That’s because the audit time-limit period, called the statute of limitations, starts running only if you file a tax return.

As a practical matter, however, if you didn’t file a return for a specific year and the IRS hasn’t audited you within six years of the return’s due date, you may have escaped the audit net.

So, if it’s 2020 and you received an audit notice for your 2017 tax return, you probably don’t need to worry about the IRS expanding your audit to cover 2011, when you never got around to filing.

Audit Notices Sent Toward the End of the Three-Year Period

Most likely, your audit notice is dated somewhere between 12 and 18 months after you filed your return, assuming the IRS isn’t accusing you of understating your income by 25% or more or of fraud.

Remember that the IRS not only has three years to begin an audit of your return but must complete the audit within three years of the filing date. On top of that, the Internal Revenue Manual directs auditors to complete audits within 28 months of when you filed your tax return. This allows the IRS an additional eight months to process any appeal.

Essentially, this means the IRS system is set up to allow auditors between ten and 16 months to open and close an audit. Sometimes, it is in your interest to slow down the process. By delaying an audit, the auditor may face the 28-month deadline without having delved too far into your financial affairs.

Bishop Toups

Bishop L. Toups is an estate planning, elder law, and tax attorney in Southwest Florida. He helps clients with their various estate planning needs and helps clients navigate the Medicaid system here in Florida. He also represents clients nationwide and worldwide in front of the IRS. Bishop is also a V.A. accredited attorney and helps Veterans obtain benefits from the Department of Veterans Affairs.