How far back can the IRS audit you? Here's what might trigger one.
Medora Lee, USA TODAY
6 min read
It's rare IRS agents will come knocking on your door to perform an audit these days. Most audits are now done via mail or in person at an IRS office or the taxpayer's place of business, but they're scary, nevertheless.
When you're audited, it means your return was selected from a batch of returns for a closer inspection.This happens because your tax filing was among those that showed the "highest potential noncompliance," the IRS says. The agency uses data driven algorithms, third-party information, whistleblowers and information you provide to determine if income, expenses and credits are reported accurately.
The easiest way to avoid an audit is to be "accurate, honest, and modest," said Eric Scaringe, principal at certified public accounting firm UHY.
What triggers an IRS audit?
Mismatches. "One thing tax jurisdictions like more than money is information," Scaringe said. "They look for mismatches, and use AI (artificial intelligence) tools to find it and send autogenerated notices. That's low hanging fruit."
For instance, make sure you enter your information from your W-2 income tax form correctly so it's consistent with the income that's stated on official income tax documents like a 1099 or W-2, said Erin Collins, National Taxpayer Advocate at the Taxpayer Advocate Service division of the IRS. Or else, you can expect an IRS inquiry.
"We find a lot of taxpayers take their last paystub (of the year) and use that number," she said. But they can run into problems because that last paystub may not cover their typical pay period.
She also recommends parents discuss who will be claiming a child on their return if they file separate returns. They should also ensure additional caretakers like grandparents don't try to claim a child on their return if they don't meet the IRS' requirements for doing so. Otherwise, an audit may be triggered if multiple people try to claim the same child as a dependent on their returns.
People often get tripped up on the earned income tax credit (EITC) because IRS records show that a child claimed by the taxpayer does not meet the relationship or residency test to be considered a qualifying child, according to the Taxpayer Advocate, an independent organization within the IRS that works for taxpayers.
Michael Steffany, a senior tax attorney at Withersworldwide, said in his experience, "the IRS concentrates its efforts on those items most likely to result in a large amount of additional tax due."
"We continue to see high net worth taxpayers, as well as taxpayers with non-U.S. income and foreign entities, be a particular point of concentration," he added.
The IRS says audits can also commonly be triggered through a random selection process in which a computerized system compares your return "against 'norms' for similar returns," the IRS said in an online post.
For example, a freelancer earning $100,000 might typically have $5,000 in travel costs. "If you’re out there and wrote $50,000 in travel costs, that's way outside the mean someone would deduct," said Mark Jaeger, vice president of tax operations at preparer TaxAct. "The IRS would flag that because you’re an outlier."
Another trigger for an audit is if the information on your return is connected to someone else's, such as a business partner or investor, who is being audited.
Who gets audited by the IRS the most?
In terms of income levels, the IRS in recent years has audited taxpayers with incomes below $25,000 and above $500,000 at higher-than-average rates, according to government data.
Treasury Secretary Janet Yellen and acting IRS Commissioner Douglas O'Donnell have said that the nearly $80 billion the IRS will be receiving from the Inflation Reduction Act won't be put toward increasing audits above historical levels for taxpayers who earn less than $400,000 a year.
Steffany said the influx of funds is likely to increase the number of audits for high earners, which has fallen in recent years. Collins said that's due to the funding issues the IRS experienced.
Odds of being audited by the IRS
In 2022, 3.8 out of every 1,000 returns, or 0.38%, were audited by the IRS, according to a recent report using IRS data from Syracuse University’s Transactional Records Access Clearinghouse. That was down from 4.1 out of every 1,000 returns filed, or 0.41%, the prior year.
Low-income wage-earners taking the EITC were 5.5 times more likely to be audited than anyone else "because they are easy marks in an era when IRS increasingly relies upon correspondence audits yet doesn’t have the resources to assist taxpayers or answer their questions," the report said.
You'll initially be contacted by snail mail. The IRS will provide all contact information and instructions in the letter you'll receive.
If the IRS conducts the audit by mail, it'll ask you for more information about certain items on your tax return such as income, expenses, and itemized deductions.
If you have too many books or records to mail, you can request a face-to-face audit and the agency will provide contact information and instructions in the letter you receive.
Typically, the IRS can include returns filed within the last three years in an audit. If it finds a "substantial error," it can add additional years but it usually doesn't go back more than the last six years.
If you receive an audit notice, you generally have 30 days to respond. Take that time to read the letter carefully to understand what the IRS is requesting. Not all notices are audits and not all are related to your latest tax return.
Once you understand, you can craft your response and provide the IRS with the information it's requesting. If it's a simple math error you agree with, you can often send money to cover what you owe or request a payment plan.
If it's more complicated, you'll have to write an explanation with documentation or find a tax pro to help you. You can also check the Taxpayer Advocate Service for some guidance.
Whatever you do, don't ignore the IRS. Failure to comply could result in additional interest and penalty charges for late response and/or providing incomplete information or losing your right to challenge the finding if you don't agree, the Taxpayer Advocate says.
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.
