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While you might assume you can’t be audited if you’ve already received money back from your taxes, that’s a misconception. You can.
The U.S. Internal Revenue Service (IRS) can audit tax returns even after it has issued a tax refund to a taxpayer. According to the statute of limitations, the IRS can audit tax returns filed within the previous three years. In certain instances when a significant error is identified, the IRS can audit returns filed even farther back than that, but typically no more than the previous six calendar years.
Key Takeaways
- Your tax returns can be audited even after you’ve been issued a refund.
- Only a small percentage of U.S. taxpayers’ returns are audited each year.
- The IRS can audit returns for up to three prior tax years and, in some cases, go back even further.
- If an audit results in increased tax liability, you may also be subject to penalties and interest.
- Reviewing your return carefully before filing can help to minimize the odds of being audited.
What Is a Tax Audit?
Every year, the IRS selects numerous tax returns for audits. This process essentially involves having your return inspected by an IRS representative. The person checking your return may be looking for errors or discrepancies that might have caused you to underpay your taxes. Audits can also be requested if tax fraud is suspected.
According to the IRS, 509,917 returns were chosen for an audit in the 2020 fiscal year. This resulted in $12.9 billion in recommended additional tax.Tax returns can be selected for an audit regardless of whether a taxpayer has been issued a refund. Tax returns selected for audits are chosen for two reasons:
- Random selection and computer screening. Some returns are chosen for audit based on a statistical formula. The IRS compares the taxpayer’s return against “norms” for similar returns in these cases. The return may get audited if it’s notably different or stands out as an outlier.
- Related examinations. The IRS may select a return for audit if it involves issues or transactions with other taxpayers—such as business partners or investors—whose returns were selected for audit.
The IRS mainly conducts its tax audits via mail or personal interviews at local IRS offices or “in the field” at your business or home.
What Can Trigger a Tax Audit?
While your odds of being targeted for an audit are relatively low (less than half a percent of individual returns are audited), some returns are more likely to be scrutinized than others.
The IRS doesn’t specify exactly why it chooses some returns for audits and not others. Again, it’s worth noting that some selections are made entirely at random, meaning you could have a perfectly accurate return and still be audited.
But if you’re wondering what might increase your odds of being audited, here are some common red flags that could lead the IRS to take a closer look at your return.
Earning a higher income
Being a higher earner could work against you at tax time if the IRS suspects that you’re trying to cut corners and minimize your tax liability. For the 2017 and 2016 tax years (the most recent available data), taxpayers earning $1 million or more had a much higher chance of being audited than those earning less than $1 million. The trend did not show for 2018, but examiners may still be reviewing returns, and full data may not be in on the year.
Failing to report all of your income
If you work as an independent contractor, received gambling or lottery winnings in the previous year, or experienced another income windfall, failing to report those things on your return could trigger an audit.
If you fail to report any income when you file your return, you should file an amended return as soon as possible. You’ll need to pay any taxes due, and this can help you avoid penalties and interest.
Excessive deductions
Taking deductions can help to reduce your taxable income for the year and potentially increase your refund. But if it looks like you’re taking deductions (or tax credits) you aren’t entitled to—or your deductions seem unusually high—that might prompt the IRS to review your return.
Being self-employed
Self-employment means you may have irregular income or that—instead of reporting income—you’re reporting business losses. If your self-employment returns show any unusual patterns with income or losses, the IRS may want to check that your tax reporting is accurate.
Contrary to popular belief, claiming the home office deduction won’t automatically result in an audit (keep in mind that most people now either work from home or have a home office). The IRS has made it easier to deduct home office expenses using a simplified method.
Using round numbers
You might assume it’s easier just to round up or down when reporting income or expenses, but that’s a no-no. The IRS might raise an eyebrow if your return is full of round numbers, since it may look like you’re guessing at what your income or expenses actually were.
What If Your Return Is Audited After You’ve Received a Refund?
If you’ve been audited, what happens next depends on what the audit turns up (or doesn’t). Tax audits can result in no corrections or corrections with a taxpayer either owing more or being entitled to a larger refund—although the latter is rare.
If you owe taxes after an audit, it’s in your best interest to pay as quickly as possible. The IRS can assess a failure-to-pay penalty if you don’t pay promptly and interest can accrue. If you don’t have the money to pay in full, reach out to the IRS to discuss setting up an installment agreement to pay your outstanding taxes over time.
Statute of Limitations for Tax Audits
While the IRS tries to audit tax returns as soon as they are filed, it is not unusual to receive an audit notice about tax issues going back a few years. There is a statute of limitations for how much time the IRS has to impose additional taxes—typically three years after a return is due or was filed, depending on which is later.
If a tax issue is not resolved within the time permitted by the statute of limitations, the IRS may ask a taxpayer to extend the statute for additional time. A taxpayer can decline such a request, forcing the IRS to make its tax determination based on available information only.
How Long Does an Audit Take?
While the IRS has three years to audit your return, most audits wrap up within one year. The exact amount of time depends on the type of audit (e.g., mail audits tend to move faster than office audits), the complexity of the issues, the availability of the information the IRS requests, scheduling availability, and your agreement or disagreement with the findings.
How Do You Know the IRS Is Auditing You?
If the IRS decides to audit or “examine” your tax return, it will notify you by mail. The IRS does not initiate audits by phone. If you receive a phone call saying you have been selected for an audit, it is very likely a scam.
How Does the IRS Conclude an Audit?
According to the IRS, an audit can be concluded in one of three ways:
- No change: This happens if you substantiate all the items being reviewed.
- Agreed: The IRS proposes changes, and you understand and agree with the changes.
- Disagreed: The IRS proposes changes, and you understand but disagree with the changes.
What if I Disagree With the Audit Findings?
The Bottom Line
You can indeed be audited by the IRS, even if you’ve already received a tax refund. If you are chosen for an audit, consider whether you want to get assistance from a tax professional to navigate the process. Most important, be prompt in responding to IRS requests for documentation or other information so the audit can be resolved as quickly as possible. If you do end up having to pay more in taxes, try to pay it off as soon as possible to minimize the penalties and interest you owe.