How Far Back Can The IRS Audit?

...And How Long Does An IRS Audit Take?

This is a transcript from a short Q&A Video filmed. Attorney Tony Ramos answers some of the most Google-searched for questions about dealing with the IRS.

Today, attorney Tony Ramos answers several questions regarding IRS audits. They are:

  • "How far back can the IRS audit me?"
  • "How long does an audit take", and
  • if there are warning signs you are about to be audited.
This is for entertainment purposes only.

Well, they are all over the place. Some audits are simple, while other are more complicated. I've seen some audits take a couple of years others that take three months. So it's an impossible question to answer, but usually they take longer than you think.

You go back and forth and provide proof and you get extensions of time. Sometimes for the bigger audits, the IRS issues a summons to your bank. This is to get information that you may not have available, like copies of checks, copies of deposits, and other documents.

So you know, the time varies based on the complexity of the case and also the workload of the of the examiners. Sometimes the examiners at the IRS are so overloaded they can't get to your case for months and months.

How Far Back Can The IRS Audit?

The general rule for audits is that the IRS has three years from the date of assessment. Assessment is when the IRS officially charges you as owing taxes.

For example: you file your tax return today, it may take a few days or a week or so to get assessed. And that's when they usually assess you. 

Sometimes it takes a while for the IRS to to give you an additional assessment.

They study your return again and you get another assessment for a larger amount. Well, the three years starts to run again on that new assessment.

So the general rule is three years. And incidentally, people are limited to the three years to claim a refund.

If you file a late tax return and you expect a refund, you can only go back three years from the tax return's due date.

You are not going to get the refund back if you file your tax return more than three years from the time that tax return was due.

What are some early warning signs that I might be audited soon?

There are no real warning signs, but you'll get a notice from the IRS that you're under audit.

However, if you take risky deductions, which is something that your tax preparer maybe shouldn't be so aggressive about, or if from one year to the next, he totally changed the way you're reporting different items that might trigger an audit.

And then there's a certain percentage of audits that are random. So it's difficult to be able to tell you about the warning signs.

There are different types of audits. Sometimes the examiner shows up to your place, other audits are conducted at a local IRS office.

Others are done remotely and handled by mail. So there are different ways the IRS can audit you.

Can The IRS Audit You Two Years in A Row?

Oh, yes. Lot of people get audited more than that, especially large taxpayers. Well, yeah, that is the answers. Yes. I've seen audits start for one year and then expanded to other years.

IRS audited me. I have no receipts. What would you say to those people?

Well, the general rule is the taxpayers have the burden to prove their deductions.

That's why you keep receipts and other forms of proof of expenses.

Often, people think they just have to send in their bank statements without additional proof.

Let me give you an example.

Let's say you're claiming gasoline expenses for work purposes. And you go to a convenience store to pump gasoline. You have a receipt from the convenience store which details how much was for gasoline and other purchases. The bank statement will only show the total amount but not the amount for the gasoline.

So that's why you need the receipt to back you up.

Now, a lot of the IRS examiners are more reasonable.

Sometimes, you can convince them even though you don't have the receipts.

And another thing while we're on audits... 

My experience is that a lot of times, the examiners will focus on one area.

They could audit the whole tax return, but they choose to focus either on under-reported income or one of the expense categories.

Ex: let's say you're a small businessman. You are a contractor and you're buying supplies and the supplies look to be overstated. And so the examiner focuses on these deductions.

At other times, small businesses also get in trouble because they deposit money,and they take out cash for personal use.

And then they redeposit the money  back into the business, but they don't show that it's a re-deposit of the same money. In this situation income is counted twice.

So in this example the IRS will focus on the income side. But going back to the first question, sometimes you don't need receipts, but generally you will need to provide them.

Yes ,they can deny deductions without receipts. 

Are there different types of IRS audits?

I think I mentioned to you a field audit. This is when they go to your place and an audit when the taxpayer goes to the IRS offices.

They can also do it long distance. So yes, there are different types of audits.

Can you give people just a couple of tips to avoid an IRS audit?

I would say the first tip is get a competent tax preparer.

I really recommend a CPA, a certified public accountant. There are many people that prepare tax returns.

Some do not have the knowledge or the expertise, and they get too aggressive with deductions. This can trigger an audit.

They may not realize that they're going to get their client(the taxpayer) into more trouble than the deduction is worth.

That's the first thing. Second, you may not be able to avoid an audit, but if you have good records, you can withstand the audit and come out fine.

If you're telling the truth, and you have the records to support you, you're going to be okay through an audit.

So exercise good business practices. Good record keeping and choose wisely, who's going to prepare your tax returns.

How to prepare for an IRS audit or to how to respond to an IRS audit letter

Well, you know, I always recommend you get professional help because the IRS does not represent you.

They can convince you that they're right and you're wrong, because you do not know enough to challenge the examiner.

There are some gray areas and so you should prepare by getting good representation.

If not, then make sure you have all your records available including all of your bank statements, receipts, and try to be organized.

Some people show up to an audit with a box full of receipts which are not organized. Usually that doesn't go very well because you make the IRS examiner have to do a lot of work.

So, be organized and prepared. Be prompt in responding to the examiner's requests. Especially if it's a high dollar amount involved, the money you pay to a professional will probably save you more, rather than trying to do it yourself.

What triggers the IRS audit?

Let me tell you something that I've come across several times.

Some taxpayers have a business as a sole proprietorship and they use a Schedule C on their income tax return. This schedule includes income and expenses to arrive at taxable income.

For example, the Schedule C states they made $20,000 a year profit and they have no other source of income(besides their business).

But then you look at their tax return and they have a home that is claiming mortgage interest, and the home is worth $300,000.

It is obvious that the taxpayer only making $20,000 can't live off of this income and pay all living expenses. In other words, the math doesn't work.

And so that is going to be a red flag. Saying your only source of income is your business, and you only making $20,000 a year. 

But you're living in a house that obviously requires at least $100,000 worth of income. Where are you getting the money?

In other words, the story doesn't make sense. You're just asking for an audit.


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