IRS audits are a fairly rare occurrence for ordinary taxpayers. They can be triggered by discrepancies in your tax return, or they can be conducted randomly. However, the IRS is not permitted to subject you to unnecessary examinations, and if the IRS does audit you for a particular tax year, they cannot audit you for that tax year again unless you ask them to or the Secretary of the Treasury determines that more information is needed.
While there are no limits on the number of audits you may have during your life, the IRS cannot subject any taxpayer to unnecessary examinations. As a result, the IRS can only audit a taxpayer once for each tax year unless the taxpayer requests an audit or the Secretary of the Treasury decides more information is necessary.
Audits are Rare for Most People
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 2017 fiscal year, however, the IRS selected less than 1 percent of all returns filed during the 2016 calendar 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.
Audit Triggers: Suspected Fraud
The most significant factor that triggers multiple audits by the IRS is a suspicion of tax fraud. The agency maintains (although does not disclose details) 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.
Audit Triggers: Change in Income Level or High Income
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 still quite small.
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.
Audit Triggers: Self-Employed Taxpayers
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 on a Tax Audit
Generally speaking, when it comes to a tax audit, the IRS is only able to go back three years. If there are substantial errors, they may go back further, but typically no more than six years. The statute of limitations for assessing tax is three years.