You receive an IRS notice that it will be auditing tax year 2020. Can the IRS expand the audit to include subsequent tax years?
What Tax Years Can the IRS Audit?
The basic rule is that the IRS can audit for three years after you file, but there are many exceptions that give the IRS six years or longer. For example, the three years is doubled to six if you omitted more than 25% of your income. This 25% rule can apply to tax basis too. If fraud is involved, there is no statute of limitations (SOL) restricting an IRS audit exam.
Why Would the IRS Expand the Scope of its Audit?
Generally speaking, the typical IRS auditor will only audit the year(s) in the examination notice sent to the taxpayer. IRS agents handle multiple audits and their case managers want them to complete those audits ASAP. IRS agents feel that their caseload is excessive and generally wish to complete the audit, close the case file, and move onto the next case. They generally do not want to expand the scope of their audits.
However, let’s not forget the purpose of some audit examinations. The IRS may believe, based on information in its files, that the taxpayer may have under reported his income or claimed deductions for which he was not entitled. Objectives of an audit exam or to collect additional revenues and to remind taxpayers of the importance of complying with the tax laws.
The findings of the Treasury Inspector General for Tax Administration (TIGTA) are that if a taxpayer erroneously claimed a deduction or took a tax credit in one year, there is a good chance that the same deduction/credit was erroneously claimed in another tax year. If the SOL bars the IRS from examining earlier years, that obstacle will not apply to years that follow the year of the current tax examination. If the same income or deduction/credit item is found in a subsequent year, the agent, with managerial approval, can expand the audit exam to additional years.
What happens if you do not respond to an IRS audit letter? TIGTA’s findings noted that when the IRS selects a taxpayer for examination, some taxpayers fail to respond to the initial audit notice. The TIGTA recommendation (which IRS management agreed with) is to “change the subsequent return process to address only subsequent year returns in which the taxpayer did not respond to the initial contact letter for the current examination.” In other words, if you don’t do anything (or don’t respond to the very first letter) it may carry worse consequences than if you respond with a full concession owning up to your error. Thus, it may be in the taxpayer’s best interest to proactively agree with the IRS rather than do nothing.
If You Are Selected for an Audit – Should you File An Amended Return?
If you have concerns about the accuracy of your tax return and the impending audit notice you received, you need to immediately contact your tax professional for guidance as to best strategy to implement to ensure your tax compliance. If you have concerns about fraud that you may have committed, an experienced tax professional will request that you seek legal counsel and the attorney can engage your tax professional using a Kovel Letter to protect your attorney/client privilege.
You may have heard that the IRS has a policy against “repetitive” audits. These generally apply when the IRS has conducted an audit exam pertaining to the same issue in the prior year and the prior audit resulted in a “no change” examination. They do not apply where the IRS has assessed an audit deficiency in a prior year examination or of Schedule C (sole proprietorships) taxpayers.
Tax Tip #1
If you receive a notice of an audit examination, immediately share that notice with your tax professional who is intimately familiar with the return that was prepared by him/her. The preparer can review the documentation you provided to prepare your return, review your IRS tax transcripts, and make an educated assessment of why you were selected for the audit and how best to prepare for that audit.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
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About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.