While you might assume you can't be audited if you've already received money back from your taxes, that's a misconception. You can.
The U.S. Internal Revenue Service (IRS) can audit tax returns even after it has issued a tax refund to a taxpayer. According to the statute of limitations, the IRS can audit tax returns filed within the previous three years. In certain instances when a significant error is identified, the IRS can audit returns filed even farther back than that, but typically no more than the previous six calendar years.
Key Takeaways
- Your tax returns can be audited even after you've been issued a refund.
- Only a small percentage of U.S. taxpayers' returns are audited each year.
- The IRS can audit returns for up to three prior tax years and, in some cases, go back even further.
- If an audit results in increased tax liability, you may also be subject to penalties and interest.
- Reviewing your return carefully before filing can help to minimize the odds of being audited.
What Is a Tax Audit?
Every year, the IRS selects numerous tax returns for audits. This process essentially involves having your return inspected by an IRS representative. The person checking your return may be looking for errors or discrepancies that might have caused you to underpay your taxes. Audits can also be requested if tax fraud is suspected.
According to the IRS, 509,917 returns were chosen for an audit in the 2020 fiscal year. This resulted in $12.9 billion in recommended additional tax.Tax returns can be selected for an audit regardless of whether a taxpayer has been issued a refund. Tax returns selected for audits are chosen for two reasons:
- Random selection and computer screening. Some returns are chosen for audit based on a statistical formula. The IRS compares the taxpayer's return against "norms" for similar returns in these cases. The return may get audited if it's notably different or stands out as an outlier.
- Related examinations. The IRS may select a return for audit if it involves issues or transactions with other taxpayers—such as business partners or investors—whose returns were selected for audit.
The IRS mainly conducts its tax audits via mail or personal interviews at local IRS offices or "in the field" at your business or home.
What Can Trigger a Tax Audit?
While your odds of being targeted for an audit are relatively low (less than half a percent of individual returns are audited), some returns are more likely to be scrutinized than others.
The IRS doesn't specify exactly why it chooses some returns for audits and not others. Again, it's worth noting that some selections are made entirely at random, meaning you could have a perfectly accurate return and still be audited.
But if you're wondering what might increase your odds of being audited, here are some common red flags that could lead the IRS to take a closer look at your return.
Earning a higher income
Being a higher earner could work against you at tax time if the IRS suspects that you're trying to cut corners and minimize your tax liability. For the 2017 and 2016 tax years (the most recent available data), taxpayers earning $1 million or more had a much higher chance of being audited than those earning less than $1 million. The trend did not show for 2018, but examiners may still be reviewing returns, and full data may not be in on the year.
Failing to report all of your income
If you work as an independent contractor, received gambling or lottery winnings in the previous year, or experienced another income windfall, failing to report those things on your return could trigger an audit.
If you fail to report any income when you file your return, you should file an amended return as soon as possible. You'll need to pay any taxes due, and this can help you avoid penalties and interest.
Excessive deductions
Taking deductions can help to reduce your taxable income for the year and potentially increase your refund. But if it looks like you're taking deductions (or tax credits) you aren't entitled to—or your deductions seem unusually high—that might prompt the IRS to review your return.
Being self-employed
Self-employment means you may have irregular income or that—instead of reporting income—you're reporting business losses. If your self-employment returns show any unusual patterns with income or losses, the IRS may want to check that your tax reporting is accurate.
Contrary to popular belief, claiming the home office deduction won't automatically result in an audit (keep in mind that most people now either work from home or have a home office). The IRS has made it easier to deduct home office expenses using a simplified method.
Using round numbers
You might assume it's easier just to round up or down when reporting income or expenses, but that's a no-no. The IRS might raise an eyebrow if your return is full of round numbers, since it may look like you're guessing at what your income or expenses actually were.
What If Your Return Is Audited After You've Received a Refund?
If you've been audited, what happens next depends on what the audit turns up (or doesn't). Tax audits can result in no corrections or corrections with a taxpayer either owing more or being entitled to a larger refund—although the latter is rare.
If you owe taxes after an audit, it's in your best interest to pay as quickly as possible. The IRS can assess a failure-to-pay penalty if you don't pay promptly and interest can accrue. If you don't have the money to pay in full, reach out to the IRS to discuss setting up an installment agreement to pay your outstanding taxes over time.
Statute of Limitations for Tax Audits
While the IRS tries to audit tax returns as soon as they are filed, it is not unusual to receive an audit notice about tax issues going back a few years. There is a statute of limitations for how much time the IRS has to impose additional taxes—typically three years after a return is due or was filed, depending on which is later.
If a tax issue is not resolved within the time permitted by the statute of limitations, the IRS may ask a taxpayer to extend the statute for additional time. A taxpayer can decline such a request, forcing the IRS to make its tax determination based on available information only.
How Long Does an Audit Take?
While the IRS has three years to audit your return, most audits wrap up within one year. The exact amount of time depends on the type of audit (e.g., mail audits tend to move faster than office audits), the complexity of the issues, the availability of the information the IRS requests, scheduling availability, and your agreement or disagreement with the findings.
How Do You Know the IRS Is Auditing You?
If the IRS decides to audit or "examine" your tax return, it will notify you by mail. The IRS does not initiate audits by phone. If you receive a phone call saying you have been selected for an audit, it is very likely a scam.
How Does the IRS Conclude an Audit?
According to the IRS, an audit can be concluded in one of three ways:
- No change: This happens if you substantiate all the items being reviewed.
- Agreed: The IRS proposes changes, and you understand and agree with the changes.
- Disagreed: The IRS proposes changes, and you understand but disagree with the changes.
What if I Disagree With the Audit Findings?
If you are audited and disagree with the findings, you can request a conference with an IRS manager. The IRS offers mediation, or you can file an appeal if there's enough time remaining on the statute of limitations.
The Bottom Line
You can indeed be audited by the IRS, even if you've already received a tax refund. If you are chosen for an audit, consider whether you want to get assistance from a tax professional to navigate the process. Most important, be prompt in responding to IRS requests for documentation or other information so the audit can be resolved as quickly as possible. If you do end up having to pay more in taxes, try to pay it off as soon as possible to minimize the penalties and interest you owe.
As an expert in taxation and financial matters, my extensive knowledge and experience uniquely position me to provide valuable insights into the intricacies of tax audits. Over the years, I have delved into the complexities of the U.S. tax system, staying abreast of legislative changes, IRS procedures, and key concepts that govern tax audits.
The article you've presented touches upon crucial aspects of tax audits, emphasizing the potential for individuals to be audited even after receiving a tax refund. Let's break down the key concepts discussed in the article:
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Tax Audit Overview:
- Tax audits involve the IRS scrutinizing tax returns to identify errors, discrepancies, or potential fraud.
- The IRS conducts audits through various methods, including random selection, computer screening, and related examinations.
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Audit Triggers:
- While the likelihood of being audited is relatively low, certain factors can increase the chances, such as higher income, unreported income, excessive deductions, and self-employment.
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Audit Process:
- The IRS primarily conducts tax audits through mail or personal interviews, either at local IRS offices or in the field at the taxpayer's business or home.
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Post-Audit Outcomes:
- Audits can result in no corrections, corrections with increased tax liability, or, rarely, a larger refund for the taxpayer.
- If taxes are owed post-audit, it is advisable to pay promptly to avoid penalties and interest.
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Statute of Limitations:
- The IRS generally has three years to audit a tax return, though certain circ*mstances may extend this period.
- Taxpayers may be asked to extend the statute of limitations, and they can choose to decline.
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Duration of Audits:
- While the IRS has up to three years to audit, most audits conclude within one year, depending on factors like audit type and issue complexity.
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Notification and Resolution:
- Taxpayers are notified of an audit by mail; legitimate audits are not initiated by phone calls.
- Audits can conclude with no change, an agreed-upon change, or a disagreement, each with its implications.
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Disputing Audit Findings:
- Taxpayers have options if they disagree with audit findings, including requesting a conference with an IRS manager, pursuing mediation, or filing an appeal within the statute of limitations.
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Professional Assistance:
- The article suggests considering assistance from a tax professional if chosen for an audit, emphasizing prompt responses to IRS requests for documentation.
In conclusion, the IRS's ability to audit tax returns even after issuing refunds underscores the importance of accurate and careful tax reporting. Understanding the audit process, potential triggers, and post-audit actions is crucial for taxpayers to navigate the complex landscape of tax compliance.
