Anyone who has ever filed a tax return has dreaded an audit. However, an audit is rare with fewer than one percent of taxpayers ever having to undergo the process. Learning more about IRS audit procedures is an ideal way to take some of the fear out of filing tax returns.
How Far Back Can the IRS Go for an Audit?
In most cases, the IRS has three years from the filing of the return to conduct an audit. This statute of limitations holds true whether the tax return is filed by April 15 of the pertinent year or if a late return is filed. Should the audit uncover a major error, the IRS has the ability to look at returns filed for earlier years as well. However, they don’t usually go back farther than six years. The IRS tries to act on audits as quickly as possible. This means that most audits happen on returns filed within the last two years.
Exceptions to the Three Year Statute of Limitations
The IRS has the right to audit back as far as six years if the taxpayer omitted more than 25% of their income for a single year. Taxpayers who leave out greater than $5,000 earned in foreign countries may also be audited as far back as six years. Not filing a tax return is not a good way to avoid an audit. In fact, because the return was never filed, the statute of limitations has not even begun to run. Accordingly, it’s possible to file a return that is belated by several years and then receive a notification that an audit will be conducted.
How Are Returns Selected for an Audit?
The IRS uses a scientific method for determining which returns merit an audit. The discriminate information function is a system employed by the IRS for comparing tax returns in peer groups. Essentially, taxpayers with similar jobs should have similar incomes. Should a particular return vary significantly from its peers, there is a greater likelihood that the return will be audited. This means that even people with low incomes may be audited. It also means that there is no need to avoid taking various deductions and credits. Although stories abound about taking certain deductions and credits leading to an audit, such tales are really just myths. No taxpayer should forego a tax benefit to which they are legally entitled.