A notice from the IRS that an audit is coming is the last thing anyone wants to see. Contrary to popular belief, those with incomes under $25,000 are five times more likely to be audited than those in the higher income bracket, according to a study by Syracuse University. Many times, the audits are over innocent mistakes. The next thing you will probably ask is, how far back can IRS audit?
How Far Back Can the IRS Audit?
How far back can the IRS audit you? The answer to that depends on several factors. It can be 3-years, 6-years, or forever.
For most filers, audits can only go back three years. However, auditors can look back six years if you have foreign or underreported income.
If you don’t file a return for one or more years, the IRS can audit you indefinitely. There’s no statute of limitations to protect you in this case or in cases involving tax fraud.
Additionally, in circumstances where they typically have a three-year limit, the IRS can go back further if they find a substantial mistake.
Keep in mind that the IRS tries to audit returns as quickly after the filing deadline as possible. They typically only go back over six years if they see a reason to do so.
Unfortunately, the IRS has been known to target self-employed taxpayers with several audits in a row, but the practice is becoming less common in the wake of the work-from-home revolution.
What Are the Chances of the IRS Auditing My Tax Returns?
Fortunately, the chances of the IRS auditing you are relatively low. Only 1% of filers are audited annually, which still adds up to about 300,000 out of a potential population of 25 million filers.
The IRS constantly complains that it is understaffed and underfunded. Previously, this alleged lack of resources kept audits down, but that’s all about to change.
Recent legislation super-sized the IRS by funding the hiring of 84,000 new agents to conduct audits and criminal investigations. There have also been indications that the IRS will use the fund to train officers for tactical and criminal investigation operations.
All signs point to an imminent audit boom, so now is the time to get your books in order. The IRS assures taxpayers these new agents will not target lower and middle class taxpayers, but it is best to be safe.
Potential Audit Triggers and How to Avoid Them
The best way to tackle an IRS audit is to prevent one in the first place. The IRS sometimes has the computer pick random taxpayers for an audit. This means you can only sometimes avoid them, even if you do everything right. You cannot avoid them altogether, but you can reduce your chances by paying attention to the most common IRS audit triggers.
Here are some things that might trigger an IRS audit.
Income Fluctuations
If you experience a significant change in income compared to the previous year, it might trigger an audit or IRS inquiry.
Multiple years of missing tax returns
Not filing a tax return could make you land you on the IRS’s radar. They’re going to want to know why you haven’t been filing, especially if their records show you generated income during the years in question.
Unreported income
A big red flag for an audit. If you generated taxable income, you’d best report it on your 1040, or you could run into issues.
Mathematical errors and typos
Make sure your calculations are correct! Also, double-check to make sure your income totals match what’s listed on your 1099
Ending every number in a 0 or 5
The IRS might assume you’re making stuff up if all of your numbers are too round. This is especially true when it comes to Schedule C deductions.
Large charitable gifts
Be careful about claiming too many charitable donations. At the very least, make sure you have documentation to support each claim.
Cryptocurrency
Cryptocurrency is a big red flag with regulators. If you have to trade crypto, do it with an established and reputable exchange that will provide tax documentation for your transactions.
Early withdrawals from retirement accounts
Making an early withdrawal from an IRA or tax-advantaged retirement account could attract IRS scrutiny.
Small business warning signs
If your business claims a loss in three out of five years, the IRS will almost certainly look into it. They could rule your business is a hobby and charge you back taxes and penalties for previous years
Excessive deductions
Make sure your deductions are realistic. Don’t exaggerate or fabricate deduction totals. All your numbers must be exact, no rounding.
Filing a Schedule C
Small businesses are more likely to receive an audit.
Claiming home office expense
Home office deductions were big audit trigger in previous years, but the IRS has been more forgiving since the work-from-home boom kicked off in 2020.
Using a personal car for business
Having a split-use vehicle isn’t necessarily a problem, but it could cause the IRS to take a closer look at your return. Make sure you keep a mileage log and only record business miles for legitimate reasons.
Taking business deductions for meals, travel, or entertainment
Similar to home office deductions, claiming deductions for these categories used to be a red flag. It’s not as big of an issue these days, but it could give the IRS reasons to look into your return more closely.
These are only a small sample of the many reasons the IRS may audit your return. However, they’re the most common causes we see for IRS inquiries and audits.
As you can see, sometimes a simple mistake can trigger an audit. In other cases, legitimate expenses can cause the IRS to look at your return with more scrutiny.
But, of course, these are not the only triggers; you could get audited for any other reason. The best compliance tips are double-checking your return and scrutinizing it from an IRS agent’s viewpoint, so you can do everything possible to reduce your likelihood of an audit.
Audit Survival Tips
Tip #1 – How far Back Can IRS Audit
The good news is that not all audits are bad. For instance, you can go through an audit, and the status can result in no change. Some lucky filers might also get a refund after the audit because the IRS made a mistake.
If you do get an audit, you must respond to it appropriately. The first thing you need to do is gather your documentation and make sure it is in order. The next thing you need to do is to respond to the correspondence as quickly as possible. If you answer the IRS promptly and provide the necessary information, you may avoid a face-to-face audit altogether.
Tip #2 – How far Back Can IRS Audit
The second tip is to provide them with anything they need as quickly as possible. If you do not have it, let them know because there might be alternatives. The most important thing to remember is to be friendly. The IRS agents are not out to get you, but they are people doing a job, just like you. If you are friendly, then it is more likely that they will work with you.
For small businesses that are being audited, the IRS has several tips to help you survive. The first thing you need to know is that you might not be the reason for the audit. For example, the actions of a business partner or investor can trigger an audit. Also, filing an amended return does not necessarily mean it will trigger an audit, so do not be afraid to make any corrections on previous returns.
Do not hesitate to contact them if you receive a notice and need more time to respond. They will often grant a 30-day extension. Whether you are a business or an individual taxpayer, keeping your records in order is the best advice. That way, if you happen to need an audit, you have nothing to worry about as long as you have done nothing intentionally wrong.
Final Thoughts on How Far Back Can IRS Audit
Getting audited can be stressful, but it does not need to be. It is just the IRS’s way of ensuring the tax system is as fair as possible. The best advice is to take steps to avoid any potential triggers in the first place.
If you’re unlucky enough to get audited, stay calm. If you didn’t break any rules, you have nothing to hide. However, keeping your records up to date and organized is the best defense. As long as you can justify all your numbers, you’ll probably come out of it fine.
If you’re concerned about an IRS audit, give us a shout. Our tax experts can show you how to minimize your audit risk, and help you get your books organized and compliant. Set up a one-on-one strategy session now to see what our veteran tax pros can do for you.