When it comes to taxes, there are few things worse than being audited. It feels like you’re being targeted, and it’s hard to have insight into the process. Knowing that your finances are in the hands of the IRS can be unnerving. But even if you come out victorious on your audit, you’re probably wondering if you’re going to be audited again.
Being audited once does not mean (by itself) that you will be audited again. One audit does not necessarily lead to another.
If the circumstances that led to your return being flagged for an audit remain unchanged, then you are likely at a higher risk for future audits.
Chances of Future Audits Depend on the Reason Why You Were Audited
Many audits done by the IRS consist of mismatch notices that are automatically sent out when the information provided by financial institutions or other businesses does not match what you have included on your tax return. For example, banks report the interest on any account earning more than $10 of interest per year.
If you fail to report the same amount of interest your bank said you earned, you’ll receive a letter from the IRS. Assuming that you do not make the same mistake the next year, this type of audit is unlikely to be repeated.
Sometimes the IRS audits your return to verify your calculations of certain items. One type of frequently examined calculation is the amount of deductible mortgage interest. Since 2018, you are limited to deducting mortgage interest on the first $750,000 of the mortgage loan balance.
Since taxpayers may have multiple mortgages and loans on their property, these types of calculations can be complicated and the IRS will reach out to verify that you completed the calculation correctly. In this case, if the IRS determines you incorrectly calculated the deductible amount, they often examine other years to ensure that the miscalculation did not appear on other returns.
If you are living a lavish lifestyle but never report taxable income (or any income at all), the IRS may consider this willful understating of income and examine several years at once. If they find that you have not reported all of your income, they will likely examine your returns in future years.
Can the IRS audit scope be broadened?
Yes. Depending on the initial finds of the audit. If the IRS suspects willful fraud or regular negligence in your tax reporting, they can open up the audit to look at additional items or tax years.
For example, if the IRS finds that you did not report all of your gambling winnings in a year, they will look at additional years to make sure the problem didn’t affect other years’ returns.
The IRS limits audits to the most recent six years except in the case of fraud. Most examinations are related to the most recent 2-3 years of returns.
In the case of fraud, the IRS can look back as far as they want.
Can the IRS reopen an audit?
Once the IRS has made a determination on an audit, they will not go back later and reopen the audit. They can still go back to the tax return to verify other pieces of information, but that is extraordinarily rare. The tax year could also be later included in a multi-year examination in the case of fraud.
There is a process for requesting the IRS reopen an audit called an audit reconsideration. You should only ask for an audit reconsideration if you do not agree with the outcome of the audit.
To request a reopening of an audit, you should send the IRS a copy of the original report (IRS Form 4549) along with the new documentation that supports your position.
How do you know you’re being audited?
In the event of an automated audit where your return doesn’t match the data the IRS received from other sources, you will receive a letter from the IRS in the mail with an explanation of the discrepancy and instructions for responding whether you agree or disagree.
For a non-automated audit, you will receive a certified letter from an IRS examiner that contains a detailed request for information. The letter will include the contact information including the name and phone number of the examiner so that you can contact the specific examiner to coordinate the delivery of additional information. The certified letter is a record that you received the letter and starts the response time clock for responding.
The IRS does not start audits via phone calls. If you receive a call from someone saying they are an IRS agent, you should be skeptical and call your local IRS office to verify the identity of the person calling you.
How can you prevent a second audit?
The best way to prevent an audit is to correctly report all of your income.
There are certain types of income that are more regularly audited including self-employment income and capital gains where the basis is not reported to the IRS by your financial institution. For self-employed individuals, you should make sure that your expenses are reasonable and justifiable when compared to your income.
Additionally, certain credits make you more likely to be audited including the earned income tax credit (EITC) and the American Opportunity Credit (AOC).
The most important way to prevent a second audit is to correct the error (if any) that led to the first audit. The IRS also has harsher penalties for repeat offenders including higher penalties, additional interest, and potentially jail time in the case of fraud.
Questions about the IRS reopening an audit for the second time? We have the answers.
You are not required to hire a CPA or tax lawyer, but it is recommended to consult a tax professional. Tax professionals have experience dealing with the IRS, researching specific tax issues, and navigating complex tax code. Some firms, such as Tax Shark, specialize in handling IRS notices and audits (and filing your taxes correctly in the first place to avoid the issue altogether!)
No. Not being aware of the tax laws is not a valid excuse for making an error on your return.
There are numerous non-profit tax advocates that provide assistance for free or reduced fees for low-income individuals.
The letter you receive from the IRS will contain a phone that you can call for additional information. Note that calling the IRS can be a time-consuming process. If your case includes a specific field agent, you should start there because you will have a much better chance to reach them than getting help through the general IRS line.