Almost every individual is wary of IRS audits because they tend to be quite challenging, to say the least. In the case where the audit does not go as planned, it might result in several financial penalties and litigation for the users. Therefore, IRS Audits are taken very seriously, regardless of the income threshold, and the income regency of the said user.
Under most circumstances, IRS Audits are wary from a period of 2 years, up till 6 years. This implies that the IRS includes tax filing status of periods ranging from 2-3 years and not more than 6 years. However, exceptions can still exist, depending on the case involved.
A common misconception among taxpayers is the fact that the IRS cannot audit users for a period of two straight years. However, this misconception is clearly incorrect.
How often can IRS Audit individuals?
IRS can audit individuals over a period of 2 consecutive years. In certain cases, IRS is also known to audit individuals more than once in a period of one year, if they are not satisfied with the results derived in the previous audit.
Therefore, IRS audits do not have a formal or a stringent deadline. Factually, IRS has the right and discretion to audit the taxpayers as often as it needs. In fact, an auditor also has the right to overturn a decision undertaken by a previous auditor, in the case where the auditor is not satisfied.
How does the IRS decide who to audit and when?
It is important to understand the fact that the audit selection process does not happen at random. Most taxpayers are mostly audited as a result of certain inconsistencies and red flags in the tax filing systems. Regardless of the fact that there is no formal selection process of the audit processes, it can be seen that IRS does rely on a certain computer and automated systems in order to decide upon the audit of individual accounts.
The computer programs that the IRS is known to rely on mostly identify inconsistencies in the filing system, depending on the algorithm that is set. This particular program mainly identifies issues and inconsistencies within the filed returns, which might require more information on the part of the taxpayer.
However, there are certain things that are undertaken by individuals that mostly trigger the audit process. These things are as follows:
- Making significant changes from one year to the other: In the case where individuals make substantial changes across different years, it might result in an increased suspicion on the part of the IRS. For example, if income substantially increases, or decreases over the period of one year, it might not add up from the perspective of the IRS. In the same manner, abnormal donations to the charity can also result in IRS triggering for an audit.
- Improper information, or misrepresentation of financial returns: This is something that has a very high chance of triggering an audit on the part of the IRS. Therefore, the best course of action is to ensure that all information is properly represented in the financial statements, so that there is no ambiguity on the part of the IRS. Most issues arise because of misrepresentation, and errors on the part of the filer. However, this can be avoided so that there are no issues in the longer run.
What to do in case IRS calls for an Audit?
IRS audits can result in stress and anxiety on the part of the individual. Given the detrimental repercussions that can follow in the case where the audit does not go as planned, individuals are mostly inclined to take IRS audits very seriously. However, it is important to understand that IRS Audits do not necessarily mean bad news for the individual being audited. There are certain do’s and don’ts that need to be accounted for when IRS calls for an audit so that the process can be completed with relative ease. These do’s and don’ts are as follows:
- Do cooperate with the IRS as much as possible: IRS agents mostly conduct audits based on the information that is gathered and obtained from the tax filings of the individuals. Even if IRS calls for an audit, they welcome any cooperation from the individual. If an honest mistake has been undertaken by an individual, it should be communicated with proper ease.
- Do communicate: It is of pivotal importance to communicate with the IRS. Delaying tactics never work. Being prompt and upfront with the IRS agent helps the agent to understand the situation better, so that there is clear line of action based on which the audit can duly proceed.
- DO NOT dodge the IRS: It is also important to understand that dodging the IRS renders no good. Avoiding calls, and not replying does not mean that audit will not take place. In fact, the IRS will eventually get to the root of the problem, and then carry on with the audit, in their own way.
- DO NOT lie: It is very important to ensure that all information presented in the financial returns and the financial statements is accurate, and does not reflect any misrepresentation on the part of the filer. In case of any misrepresentation, there is no need to cover up the false tracks, because they will resurface, sooner or later. Hence, it is essential to realize that lying never helps, and the best course of action is to come clean, and be as vocal as possible.
Do consecutive audits by IRS necessarily mean bad news for the taxpayer?
Regardless of the fact that IRS audits do result in uncalled for panic or anxiety, two consecutive audits by IRS does not always mean bad news for the individual.
In the case where the individual has declared all income and expenses with absolute clarity and honesty, there is no need to be afraid of the audit. If there has been an honest misclassification of any income, or anything else, it is important to understand that this too, can be fixed.
However, it is imperative for taxpayers to find out the reason behind the audit itself. They must know that the IRS only audits for a reason. If the reason is related to compliance-related issues, they can be at ease knowing that this can be remedied, and overcome with a penalty or fine in place. On the other hand, if the audit is conducted on basis of illegal window dressing, it might result in higher and more severe litigation charges.
Therefore, the severity and complexity of consecutive audits are mostly contingent on the type of audit undertaken, and the reason behind the audit itself. Having said that, consecutive audits by the IRS do not necessarily mean bad news for the individual taxpayer.