How Long Can The IRS Audit Me and What's My Risk?
By Debbie Todd - CEO of iCompass Compliance Solutions, LLC
Last Updated 04/23/2020
Summary: The IRS can audit you up to 3 years, 6 years, or even forever depending on your situation. Learn the specific factors that determine your audit risk.
Answer: It depends.
3 years, 6 years or FOREVER (yes, that’s right), BUT you CAN lower YOUR risk with a few simple-to-follow steps – read on…
Years ago, a very wise tax attorney told me, “Deb, you should
treat every single letter from the IRS as if it’s potential litigation, because it is.”
How right he was…time and time again.
“I am so glad I’m being audited”…said no one ever – at least no
one I’ve met in more than two decades of being a CPA and
resolving countless issues before the IRS.
Frankly, just saying the word “taxes” and “audit” in the same sentence is sure to wipe the smile off virtually anyone’s face…and with very good reason.
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It’s scary, it takes time you’d rather spend doing other things (like having root canal surgery or painting your house with a Q Tip) and you could end up owing Uncle Sam additional taxes for a prior year, plus interest and penalties.
Penalties and interest that could exceed the taxes owed, depending on the severity of what triggered the audit - which likely began with a letter from the IRS.
The Dreaded Plain White Envelope
When you open your mail to find a long white envelope from the IRS addressed to you that says “Official Business,” know one thing for sure…your day, and possibly the next few months, just changed.
Many people’s first inclination is to stuff the offending letter in a drawer and forget it…
Once you start an installment plan, you will have a harder time qualifying for a debt reduction request later. We recommend you speak to an expert to see if you qualify for tax relief first.
TIP: As tempting as it may be, don’t ignore the IRS Notice! Prolonging the process is just more painful – and almost always more expensive. If needed, get professional tax help.
Here’s the thing…the IRS sent you a letter because something “popped” in your return when it was processed, likely using their “work smarter not harder” tools.
IRS Smart Tools and Audit Risk
While the percentage of IRS audits has decreased during the last few years due to cuts in staffing, their percentage of collections has gone UP!
If you have tax debt, give yourself a break. 8% of all U.S. taxpayers are delinquent.
Three ways the IRS is working Smarter:
- Their focus has gotten almost laser-like on key hot-spot areas (look here),
- They use a nifty computer function called DIF (Discriminant Information Function) that compares your return to other “similar” returns – it “pops” if items appear unreasonable
- The IRS can now outsource past taxes owed to outside collection agencies to get the money, so they can focus on the accuracy aspect of filed returns
How Long Can the IRS Audit You and How Will They Do It?
As stated earlier, it depends.
Normally it is 3 years from the due date, including extensions of the year in question, but it can be extended up to six years – or in certain extreme cases, forever.
Normal - 3 Years
Typically the IRS will audit you within three years, although they typically try to notify you of a question or issue within two years.
The most common method is what they call a letter audit – ie, the dreaded white envelope.
Extended - 6 Years
If the IRS identifies a substantial error, such as understating your income by more than 25%, holding certain foreign asset accounts or taking excessive deductions resulting in substantial underpayment of tax.
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Also, claiming the EIC, CTC or other tax credits when you are not eligible or if you are involved in a business venture where someone is being audited – these can extend the audit period. These audits can be letter or in-person field audits.
Criminal & Fraud - Forever
There is a big difference between tax avoidance (paying the least amount of taxes you legally owe) and criminal tax evasion (fraud, claiming personal expenses as business expenses, abusive tax shelters or omitting significant amounts of income).
Think Willie Nelson and Martha Stewart, Don Gotti, or in earlier times, Al Capone. In these cases, the statute of limitations is typically waived as these cases can take YEARS to resolve with the IRS – Criminal Investigation (IRS-CI) agency and/or Tax Court.
Remember: The IRS normally audits you because they believe you owe them money – and their primary job is to receive all the taxes the government is legally due, to the highest extent possible, as allowed by law.
TIP: Also, if the statute of limitations is about to expire on a particular tax year, the IRS may ask you to agree to extend the timeline – you should always talk with a tax pro before doing so.
Here are steps you can take to avoid this pain in the first place.
IRS Writes Off Millions Yearly
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Avoid the Pain - Steps to Lower Your Risk
- Taking a little extra time to keep your records in good order – and retain those records in case of an audit
- Only taking deductions that you can substantiate (deductions outside of industry standards and triggering “DIFs” attention)
- Keep abreast of annual IRS hot spot focus areas – and seek professional tax help for more complicated or unusual tax filings that could increase audit risk
As Ben Franklin said, “In this world, nothing can be said to be certain, except death and taxes.”
While tax laws and the “IRS hot spots” are constantly changing and we can’t guarantee you’ll never get audited, by following the steps above, you can certainly lower your risk of getting a plain white “Official Business” envelope from the IRS notifying you it’s your turn.
By Debbie Todd
Debbie (CEO of iCompass Compliance Solutions, LLC and 1HourImpact.com) has over 22 years of public accounting, higher education, public finance, treasury and capital project experience in municipal utility ($800M/yr) and government healthcare ($2B/yr), with over 13 years of “hands-on, in the trenches” manager/senior/executive management expertise – including successfully navigating clients through the financial meltdown in 2008-2013 and representing and resolving over $500 million in audits before the IRS over her career.