You’ve just gone through a stressful IRS audit. And right when you think the worst is over, you receive the results saying you owe the government more money.
What percentage of tax returns are audited each year?
The amount of people receiving IRS tax audits has continued to decrease every year since 2012. And the current number of individual audits is the lowest its been since 2002.
The IRS audited just over 1 million tax returns in the 2017 Fiscal Year, which amounts to 0.5% of all tax returns filed for the year. Of those 1 million audited tax returns 24,087 taxpayers disagreed with the examiner’s findings. This resulted in an additional tax of almost $11.5 billion. It’s not all bad news though. Nearly 34,000 resulted in additional refunds to the taxpayer. This totaled more than $6 billion.
People with no income or income over $1 million have a higher chance of being audited. The table below shows the percentage of people audited at each income level.
How many years can the IRS go back for an audit?
The IRS aims to audit selected tax returns as quickly as possible. Being so, they mostly audit those filed within the last two years, according to IRS.gov.
Generally speaking, however, tax returns filed within the last three years can be included in an audit. And if the IRS spots a significant error, they can go back even further. But they usually won’t go beyond the last six years.
Statute of limitations
The statute of limitations for assessing additional tax is typically three years after a return is due or was filed – whichever is later. The IRS may ask to extend the statute of limitations if an audit is not yet resolved. You can, of course, refuse their request.
If you do refuse, understand that the examiner will be forced to make a final determination based on the information they have. So, depending on your situation, it may be wise to agree to extend the statute of limitations.
By doing so, you’ll have the opportunity to:
- Request an appeal if you disagree with the results of your audit.
- Provide additional documentation to further support your position.
- Claim a tax refund or credit (there is also a statute of limitations for making refunds).
If you’re asked to extend the statute of limitations, consider consulting a tax attorney before agreeing to do so.
Is there a penalty for being audited?
If the IRS selects you for an audit, there is no penalty. However, if the IRS finds errors on your tax return during the audit process, you may incur penalties.
There are four types of penalties that can result from an audit:
Taxpayers who file late or fail to pay taxes on time will incur additional interest penalties.
If the IRS finds substantial errors your a tax return, you may be liable for a penalty of up to 20% of the underpayment. You might be able to avoid this penalty if you can show that you made this mistake because you relied on a substantial authority.
Civil fraud penalty
if you made an error due to fraud, the IRS can impose a fraud penalty of 75% of the underpayment that was due to fraud.
This is the most severe penalty that results from tax evasion, fraud, or other similar crimes. This penalty can lead to substantial fines and possibly jail time. In 2017, there was a total of 2,294 indictments and 2,300 convictions related to IRS investigations (source). The IRS doesn’t investigate that many people when you consider the number of taxpayers who are less than accurate with their tax returns. However, when they do investigate, IRS agents and lawyers don’t mess around. In 2017, the conviction rate was 91.5%. Which is low compared to their 99.9% rate in 2014.
What are your options if you don’t agree with the results?
You’ll receive an examination report once the audit is complete. This will detail the required changes to your tax return. It will also detail any additional tax, penalties, and interest you must pay.
When you receive the examination report, carefully check the details and note the areas with which you disagree. Hire a tax professional to help you review your results.
If you don’t agree with the results, you can file an appeal. You have 30 days to write your letter of protest and submit it to the Office of Appeals – an independent organization within the IRS.
What happens after you request an appeal?
Once you’ve requested an appeal, you’ll schedule your meeting. The meeting will take place either over the phone or at a local appeals office.
During this meeting, you or your tax attorney can present your objections and try to reach a resolution with the Appeals Officer. If you don’t reach an agreement with the IRS Appeals Office, you can take your case to court.
You’ll receive a 90-day letter, also known as a Notice of Deficiency. You’ll have 90 days from the date of the letter to file a petition with the Tax Court.
Where can you go to get help?
Complicated tax rules and audits can be overwhelming. Fortunately, you don’t have to face the IRS alone. A qualified tax attorney can help guide you in the right direction. They know what the IRS needs to close the case.
You don’t want just anyone representing you, though. Make sure you have a top tax relief firm in your corner. The best tax relief companies have tax lawyers and enrolled agents on staff, provide a money-back guarantee and charge competitive rates.
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Erica Gellerman is a CPA, MBA, personal finance writer, and founder of The Worth Project. Her work has been featured on Forbes, Money, and Business Insider.