How Long Do IRS Audits Take?
Few things can strike more fear into a person's heart, especially a business owner's heart, than the notification of an IRS audit. The first thing they may ask their colleagues or a search engine is, "How long do IRS audits take?" Then, they may quietly ask themselves, "How much will it hurt?"
The latter is between you and the government. As far as how long IRS audits take, the sort-of good news is that the time frame is usually under a year. The less-good news is that under a statute of limitations, the IRS has up to three years to assess you for additional taxes on the return, starting from the return's tax year due date or the date you filed it, depending on which was later. However, under some circumstances, auditing can go on for many years longer.
As far as how long the Internal Revenue Service (IRS) says it will take, the government agency is a little more evasive on the issue: "The length varies depending on the type of audit; the complexity of the issues; the availability of information requested; the availability of both parties for scheduling meetings; and your agreement or disagreement with the findings." The kind and number of errors they find in your return and the kind of fight you put up against their requests or findings are among the things that can lengthen the audit process.
The IRS is a bit clearer on how far back they'll look in your returns: "Generally, the IRS can include returns filed within the last three years in an audit. If we identify a substantial error, we may add additional years. We usually don't go back more than the last six years."
Types of IRS Audits
Simply put, an IRS audit is a review of a person's or organization's tax account and financial information to ensure everything is reported correctly according to tax law and verifying the amount of tax is correct.
When the IRS informs you that they are conducting an audit of your business, it doesn't necessarily mean that they found something wrong in your return (although they may have). They may do so because of a statistical formula that indicates that you are outside the "norms" for similar returns. Or you may have been targeted because you've had dealings with someone else who is under an audit, such as a business partner or investor.
The IRS will notify you of an income tax audit by mail, not by telephone. This is important to note in an era of IRS phone scams. The IRS also performs three types of audit processes that usually last from a few months to about a year. They include:
Usually lasting three to six months, income tax audits conducted through the mail are usually straightforward. How long they go on is usually dictated by how quickly and completely the recipient responds to the IRS letter and the complexity of the issues at stake. Typically, the IRS correspondence audit letter is sent within seven months of the tax filing and will request additional information on tax return items, including income, expenses, and itemized deductions. If it's too cumbersome to mail your tax records for the audit, you can also request a face-to-face audit.
In this case, you or your tax professional representative will meet with an agent in the IRS office. The office or field audits are usually triggered within a year of filing taxes and, for the most part, take three to six months to complete. Delays occur if the IRS agent finds problems with the information you provide or you are slow to supply complete information.
The IRS says that the types of issues selected for an office audit are "income from tips, pensions, annuities, rents, fellowships, scholarships, royalties, and income not subject to withholding; deductions for business related expenses; deductions for bad debts; determinations of basis of property; capital gain versus ordinary income determinations; and complex miscellaneous itemized deductions such as casualty and theft losses."
Field audits usually happen within a year of filing taxes and are usually completed within a year. In this case, the IRS tax agents go to your home or place of business to interview you or your tax professional. These are the most lengthy and thorough investigations, often examining multiple returns triggered by complex situations, in many cases, involving small businesses.
Besides that, costly field audits often target "high income, high wealth taxpayers, cash intensive businesses, transfer pricing, executive compensation, research and development credits, crypto currencies, partnerships and flow through entities, micro captives, offshore transactions, and syndicated conservation easements."
4 Ways an IRS Tax Audit Timeline Can Be Extended
Whether an IRS audit is extended depends on two things: the problems that the IRS finds with your return and how quickly, completely, and honestly you comply with information requests. If the IRS finds many errors in your return that need to be corrected, this can lead to penalties, appeals, searches for the correct information, and even criminal charges.
Adjustments Need to Be Made
If the auditor finds that they have to make a long of changes, or "adjustments," to your return, this can take more time, especially since it may mean opening up returns from other years. The three-year limit for the audit can be extended to six years if it's found you've neglected to report more than 25% of your income or you've omitted more than $5,000 of foreign income.
You Own a Small Business
Small business tax audits may go on longer because auditors usually have more work to do. It's more difficult for the IRS to track income from these companies because it's not reported on as many information statements as employees get. The IRS auditor can take a lot of time examining business records, including bank accounts, to determine whether the business reported all of its income. The process can be even longer if the business mostly deals in cash.
Some of the triggers for small business tax audits are tax filers who consistently ignore the due date of the returns, multiple net losses year over year, unusually high salaries, too many deductions, excessive business vehicle use, calculation errors, and unreported income.
IRS Issues Penalties
The audit can be extended if the IRS has to make many adjustments to your return and then decides to pursue penalties, taking the time to build a case. Common penalties are levied for failing to file taxes by the deadline or extended deadline, failing to pay reported taxes, failing to pay proper estimated taxes, and bounced checks.
In more serious cases, if the IRS auditor pursues tax fraud penalties, the audit can go on for years, especially if a criminal investigation is involved. Pursuing criminal charges is a rare occurrence, though.
You Seek Appeals to the Penalties
A business or individual tax audit can also be extended if you decide to dispute penalties and not file an amended return, taking your grievance to IRS appeals or even a court. Depending on the issues you are contesting, it can take six months to a year to go to IRS appeals.
To file an appeal, you need to submit a small case request or a formal written protest with the contact person named in the audit letter. A small case request is made "if the total amount of tax, penalties, and interest for each tax period involved is $25,000 or less. If more than one tax period is involved and any tax period exceeds the $25,000 threshold, a formal written protest for all periods involved must be filed."
What to Do If You're Being Audited
If you receive an audit notice, it's a good idea to promptly respond to any questions for information. While mail audits can often be handled by the taxpayer with accurate responses from their records, in-person audits should be handled with the tax advice or retained representation of an experienced tax professional, including tax lawyers and certified public accountants (CPAs). They are trained on the ins and outs of tax laws and can provide much better legal advice than yourself.
Some people fear audits and neglect to pay their taxes because they don't have the money and are afraid of the repercussions. But the IRS reminds us that it's best not to ignore our financial obligations, and you can apply for an installment agreement to pay any remaining balance. This may serve to reduce future failure-to-pay penalties.
Sometimes, the best offense is a good defense: properly kept and up-to-date tax and financial records. With Skynova's accounting software, you get an all-in-one invoicing and accounting solution made for small businesses. You can get started in mere minutes and keep accurate records of your income, expenses, sales tax, and payments, helping to expedite your tax preparation.
Other Skynova solutions to keep your business smoothly running include our free business templates. For example, our invoice template enables you to get paid faster with a customized, professional design, notifying you if it's received if sent with our email service. Getting fast payment for an invoice can help take some of the sting out of receiving an IRS audit notice.