IRS Audits & Statutes of Limitations

  • An audit by the IRS strikes fear in just about everybody. In reality, the IRS doesn’t audit a large percentage of returns. They pick those to audit based on a score from computer analysis of the tax return in question. Although the criteria may change each year, certain areas are more likely to be looked at than others. For example, if you have a high income, you have a better chance of being audited. Also, if you are self-employed, deduct part of your home as a business expense, or receive income in cash, your audit score may be high. And if you’ve been audited before and there was a problem, your future returns may be audited as well.

    If you report all of your income and take only the deductions you’re entitled to, you shouldn’t have any problems, even if your return is audited. As long as you can substantiate every item you claim, your IRS audit should go smoothly.

    What happens during an audit?

    Many times, an audit is simply handled through the mail. They may also take place at your home, an IRS office or a third party’s office (accountant or lawyer). The IRS examiner will let you know exactly what records you will need to have available. You can handle the matter yourself, or call in a professional to help you. If your return was prepared at a Liberty Tax® office, we will accompany you to your audit and explain how your return was prepared.

    Once the IRS audit is completed, you can either agree with the IRS findings and pay the tax plus any interest or penalties, or you can appeal the decision. You may even be due a refund, or the IRS may just accept your return as you filed it.

    Statute of Limitations

    The IRS must bring action within a certain number of years unless fraud is suspected. The statute of limitations for conducting an audit is three years from the  filing deadline. There is a ten year statute of limitations for collection of taxes.

    Generally, you must file a claim for a credit or refund within three years after the date you filed your original return or within two years after the date you paid the tax.

    See IRS Publication 1546, How to Get Tax Help for more information about your rights.