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IRS Audit Process: Why and how far back can the IRS go?

IRS Audit Process: Why and how far back can the IRS go?
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An IRS audit is enough to make anyone break in surges of sweat. The audit is just an examination of your tax returns when there are misunderstandings, or the IRS has strong reasons to believe that your tax returns were fraudulent. However, IRS audits can happen at random through computer screenings, so if you get audited, it doesn’t mean you did something wrong.

Types of IRS Audits

There are four major types of audits:

  • The random ones – the auditors will not examine anything, in particular, it’s just a routine process
  • The field audit – this is the serious one, as the agents will go to your office or your house
  • The office audit – you’ll be summoned to an office within the IRS
  • The correspondence audit – the least frightful, as it involves information on your receipts for the tax returns

How Far Back Can the IRS Audit Me?

As of 2016, the IRS is allowed to go as far as six years; in the past, the limit was three years. This period is called the Statute of Limitations and once again, it has been extended to 6 years.

Of course, how far back they will go depends on the seriousness of the matter. If there are signs of fraud, tax evasion and any other criminal misdemeanor, the IRS audit will go back as much as it can. But once you did nothing wrong, there’s no reason for you to fear an audit.

The Process

The correspondence audit is mainly conducted through letters back and forth between you and the IRS until the situation concerning checks and receipts clears up. That’s why you should never throw away documents. Keep them somewhere safe. It doesn’t matter how trivial some papers look. You cannot know what the IRS will need from you, so it’s better you have every document that pertains to the activity of your company.

The other three types of audit involve professional IRS auditors. This means that the agency will either call you and invite you at one of their offices or send an auditor to your office. The process, too, depends on the severity of the problem. You should always keep an eye on the Statute of Limitations to see whether it expired or not.

The IRS usually asks you to sign for an extension of the statute if they need more time, and you can choose to sign it or not. A legal tax attorney can tell you what’s the best option for you.

IRS Audit Reconsideration

“Reconsideration” does not mean that the IRS will consider not checking you. It’s a tool that’s used when you’re not happy with the results of the previous audit, i.e. when you think the process was unjust or when they inflated your taxes for no reason at all.

Subsequently, you can request such a reconsideration when:

  • The assessments were made after the Statute of Limitations
  • The tax liability was illegally or erroneously assessed
  • The taxes were excessive

You should keep in mind, however, that this reconsideration is not a part of your rights as a taxpayer. It’s completely in the IRS’s hands. They decide whether you are eligible for it or not.

You can think about reconsideration as a synonym for “postponement”; you can postpone an audit, but you cannot avoid it. It will take place sooner or later. You can get a maximum of 31 days to delay the IRS audit, and if you fail to reply their notice after that time, the audit is going to happen no matter what you do, because it cannot be delayed a second time.  

Should I Hire a Tax Professional When Audited?

Yes, it is recommended for you to do so. By having a representative, you won’t have to deal with the audit yourself. The IRS gives you the option of hiring a licensed CPA or tax attorney to represent you. In order to do that, you must sign the Form 2848. A tax professional knows all the mechanisms that work within the IRS and the tax system. It’s less likely that you have that amount of knowledge on the topic.

You should look for a CPA as fast as you got the audit notice from the IRS, so he can look through all your documents and have everything ready for the auditor. Another reason why a CPA is absolutely indispensable in the unfolding of an inspection is that he will most certainly know when the IRS auditor is wrong and when he’s right. As a result, you won’t be at risk of being penalized for something you didn’t do or being assessed on erroneous information provided by the said auditor to the IRS.

So, now that you know all the essential information about an IRS audit, you can be prepared the next time you’ll get a visit from the agency. If you also have a tax professional next to you, then you can be sure that there will be no room for errors.