Knowledge is at the heart of protecting your interests and your rights. Perhaps this is no more true than when it comes to dealing with the Internal Revenue Service (IRS). One issue associated with the IRS that causes taxpayers a great deal or concern is the dreaded audit.
If you are like most taxpayers, you likely have a variety of questions about an IRS tax audit. A primary issue that may be of interest to you is how many times the IRS can audit you. Understanding the rules associated with audit frequency can assist you in putting your own tax situation into a reasonable and realistic perspective.
Audits in a Lifetime
Pursuant to the Internal Revenue Code and the companion rules developed by the IRS, there is no lifetime limitation on the number of times that the agency can audit you. With that noted, there are certain categories of taxpayers who are more likely to find themselves subject to an IRS tax audit, let alone multiple audits over time.
For the vast majority of wage earners in the United States, less than 1 percent will receive an audit notice in any given tax year. Therefore, although there is a theoretical possibility that any taxpayer could face one audit after another, the reality is that such as situation is not at all likely.
The most significant factor that triggers multiple audits by the IRS is a suspicion of tax fraud. The agency maintains (although does not disclose) that it has systems in place that red-flag certain taxpayers who engage in conduct or activities many times associated with tax fraud.
An individual or business suspected of tax fraud will be subjected to audits on what might be an ongoing and annual basis. Because one of the primary goals of an audit is to uncover fraud perpetrated by a taxpayer, an individual or business in this type of position will have next to no recourse to reduce audit frequency. The only hope of lessening the number of audits the taxpayer is subjected to is if the individual or business can demonstrate that the agency is unfairly targeting that person or firm, that the IRS is abusing its discretion in conducting ongoing audits.
Another factor that triggers more frequent audits of individual taxpayers is income level. There are two ways in which a taxpayer's income level will cause more frequent audits.
First, individuals in higher income brackets are more likely to be audited by the IRS with greater frequency. This generally includes taxpayers who are making $500,000 or more in a particular tax year. However, keep in mind that although these higher income level taxpayers have a greater audit exposure, the percentage who end up being audited each year is less than 2 percent.
Second, individuals who have highly fluctuating income levels face a higher prospect of being audited. For example, if a taxpayer reported $200,000 in income one year and $25,000 the next, this gap in income from one year to the next likely will catch the IRS' attention.
Men and women who are self employed are slightly more likely to face audits with greater frequency than individuals who are employed by a third party. The rationale behind a higher audit rate for self-employed people rests in the fact that individuals in this position are able to better mask taxable income than are their counterparts who work for third-party employers.
Statute of Limitations
Generally speaking, when it comes to a tax audit, the IRS is only able to go back three years. If you have understated your income by more than 25%, then the statute of limitations is six years. In the event the agency discovers the taxpayer has not filed a tax return, engaged in tax fraud or has taken steps to cover up or conceal illegal conduct, the IRS is not bound by any the time limitations.