IRS Audit Process Timeline Explained
TABLE OF CONTENTS
IRS Audit Process Timeline
What Is An IRS Tax Audit?
Timelines For Different IRS Audits
Common Factors That Can Extend Audit Timelines
IRS Tax Audit Procedure
Why Are Tax Returns Selected For Audit?
How Are Tax Returns Selected For Audit?
How To Check The Status Of Your IRS Audit
What Is The IRS Looking For During A Tax Audit?
How To Prepare For An IRS Tax Audit
How Long After Filing Your Tax Return Can You Be Audited?
Can Tax Audits Impact Tax Refunds?
How Can Tax Professionals Help During An IRS Audit?
Key Takeaways:
- The main purpose of an IRS audit is to look for underpaid taxes, usually through underreported income or overstated tax deductions.
- There are three main types of IRS audits with slightly different timelines. Correspondence audits and office audits usually take 3 to 6 months following the initiation of the audit process, whereas field audits can take multiple years.
- Some of the factors that can increase the IRS auditing timeline include the IRS finding multiple adjustments on the tax return, the IRS issuing penalties, owning a small business, taking a long time or failing to respond to your audit letter, the IRS agent having a large caseload, or disagreeing with the IRS audit decision.
- The statute of limitations allows the IRS to audit up to three years after tax returns have been filed, and if the audit uncovers a significant understatement of income, the audit could be extended to up to 6 years after a tax return is filed.
IRS Audit Process Timeline
The timeline for how long it takes for tax audits to be complete depends on the type of IRS tax audit being conducted, the accuracy of the initially filed tax return, the complexity of the case, and the taxpayer’s compliance with the auditing process.
The general timeline from start to finish that it takes for a typical tax auditing process to conclude is from a few weeks to approximately a year, but this timeline can be extended to several years if the investigation leads to criminal prosecution.
What Is An IRS Tax Audit?
An IRS Tax audit is a thorough examination of an individual’s or an organization’s financial accounts and tax returns to ensure that all of the items, including income and tax exemptions, are reported correctly according to the Internal Revenue Code.
The purpose of IRS audits is to ensure everyone who submits a federal tax return is paying the correct amount they owe in taxes and to see if there is a red flag within their tax filings that could help identify any cases of tax evasion or tax fraud. If an IRS audit reveals a deficiency in the taxpayer’s tax payment, they may be subjected to an increased tax bill.
Timelines For Different IRS Audits
There are multiple types of IRS audits, each with a slightly different process and different examination timelines.
Correspondence Audits
A correspondence audit, also referred to as a mail audit, is generally the quickest and simplest type of IRS audit, usually allowing the tax return issue to be resolved without the taxpayer being required to meet with an IRS auditor in person.
Within the IRS letter the taxpayer receives in the mail, they will be able to learn the status of their income tax return and what information is required to move forward with the auditing process. Sometimes the IRS may request that the taxpayer submit additional tax forms or supporting receipts to use as evidence for the deductions claimed on their tax returns.
If, upon submitting these additional documents, the IRS agent determines that the information provided supports the reported actions, the mail audit can be concluded without having to meet in person.
During correspondence audits, taxpayers are usually notified about the status of their tax returns within seven months of filing. Afterward, depending on how soon the taxpayer responds to the audit letter, how accurate the response is, and which type of tax issues are involved, mail audits are usually resolved within three to six months.
Office Audits
An office audit is a slightly more comprehensive investigation process, requiring the taxpayer to meet with an IRS auditor in person at an IRS office, with or without the help of a tax professional to act as their representative throughout the audit.
This face-to-face interview during which the examiner investigates the taxpayer’s income tax return is usually conducted at an area office that is local to the taxpayer’s residence, or in the case that it is a small business being audited, near the location where the company conducts business.
At this meeting, taxpayers must bring all of their tax and financial information so that the auditor can evaluate their documentation, such as bank statements, previous tax returns, financial records, business data, and receipts, to determine the accuracy of the information reported on their tax return.
Office audits are usually initiated within one year of the taxpayer filing their tax return, and when responded to promptly, the total audit process can usually be completed within three to six months.
This timeline can be delayed if the taxpayer provides incomplete information during the audit or if the audit reveals underlying tax issues that require further investigation, but a tax pro can often anticipate errors and provide assistance in streamlining the audit process.
Field Audits
A field audit is the most comprehensive type of tax audit and the process can vary depending on the complexity of the tax case. Field audits are conducted in the home or business location of the taxpayer being audited, and often involve the analysis of all items listed on the federal income tax return.
The two main types of field audits include:
1. General Program: a type of field audit during which the examination is conducted by a single IRS agent at the location of the business or home of the taxpayer being investigated.
2. Team Examination Program: a type of field audit during which a team of IRS examiners conducts an examination, usually during audit cases involving larger organizations with potentially complex tax issues.
During field audits, the revenue agent will thoroughly audit all of the financial records available at the place of business or residence, working to ensure that all income amounts have been accurately documented within their tax return and that all expenses claimed in their books are viable to be deducted from their tax return.
Although the IRS will usually send the taxpayer or a small business an audit letter within a year of them filing their tax return, as field audits often involve more complex tax issues, the entire process will often last about a year. Field audits often involve the investigation of multiple tax years, with the extensive analysis of their financial records, which contributes to the longer audit process timeline.
Common Factors That Can Extend Audit Timelines
There are several other factors that can result in the delay of audit completion.
The IRS Finds Multiple Adjustments To Your Tax Return.
If the IRS auditor finds a lot of things to change on your federal income tax return, this will often raise questions and cause them to investigate more thoroughly. This additional investigation may involve the tax auditor looking back through records from previous tax years and, therefore, it might take additional time to complete the IRS audit.
You Are A Small Business Owner.
Small business owners often experience longer auditing timelines as this business structure requires a more thorough investigation by the auditor as compared to a larger business. This is due to the fact that small business income is not always reported on wage-earning employees’ collection information statements such as IRS Forms 1099 and W-2.
Instead, to accurately gauge the total income for a small business, the auditor will have to investigate different types of records, such as bank accounts, accounting records, and websites, to ensure all income was reported. This tax audit process can especially be delayed if the company accepts a large number of payments in cash, as the evidence of accuracy is more difficult to prove.
If you own a small business and wish to speed up the time limit it takes for an audit to be completed, prioritizing the meticulous organization of your bookkeeping records can make the process much easier in the case that you are selected for audit, as any information about your business finances will be easy to access and categorize without any searching.
You Take A Long Time To Respond Or Fail To Respond To Your IRS Audit Notice
Factors such as taking a long time to respond to an audit letter that was sent in the mail or failing to respond altogether can significantly extend the time it takes for the audit process to be completed.
An IRS audit is not something that can be ignored. If you receive an audit letter and want it to be over with as soon as possible, responding to the audit notice quickly will initiate the assignment of an IRS agent and therefore the review of your case.
The IRS Plans To Issue Penalties.
When the IRS makes many adjustments to a tax return during the auditing process, they will often want to issue penalties to the individuals related to the problems found in the tax audit.
When deciding which penalty is appropriate for the tax situation, the IRS auditor will ask the taxpayer questions about their attempt to comply with the tax law and make their decision based on the information revealed in the audit.
There are IRS penalties that may be assigned during an IRS audit, such as:
- Failure to file penalty
- Late filing penalty
- Underpayment of tax liability
- Failure to pay tax liability
- Late payments of tax liability
- Understatement of income
- Failing to state all income sources
- Underpayment of estimated tax
- Failing to report international income
- Claiming credits and deductions for which you do not qualify
These penalties can be smaller or larger depending on the taxpayer’s tax history, underpayment amount, and intentions when filing. Taxpayers can also be charged interest on both the unpaid tax amount and the penalty amount.
If the IRS audit reveals that the taxpayer intentionally understated their income or overstated their tax deductions, the IRS may pursue the most severe type of penalty for tax fraud. In this case, the auditor often goes “silent” during the IRS decision-making process.
Being convicted of tax fraud and facing criminal prosecution can cause the audit timeline to last several years. Still, this conviction is rare relative to the millions of tax returns filed yearly. In the 2022 fiscal year, the IRS completed 2,552 criminal investigations in areas including legal-source tax crime cases, illegal-source financial crime cases, and 544 narcotics-related financial crime cases.
Your Assigned IRS Agent Has A Large Caseload
There is a chance that the IRS auditor you are assigned to has a large number of audit cases to review, and in this situation that is out of your control as the taxpayer, these extenuating factors can increase the time it takes for the audit to be complete. It is in your best interest to be active and informed throughout the process so you are aware of the situation.
You Disagree With The Outcome Of The IRS Audit.
After the tax auditing process is completed, taxpayers have the right to accept the results of the audit or to disagree and take the case to either an IRS appeals conference or to a tax court. The taxpayer will be able to analyze the examination report created by the IRS auditor and learn which tax issues were addressed during the process.
During a situation in which clients disagree with the results of the audit, the additional appeals process can add six months to a year to the total auditing timeline, depending on the circumstances.
IRS Tax Audit Procedure
Why Are Tax Returns Selected For Audit?
There are several reasons why an individual or business may be selected for an IRS audit. According to the IRS, some tax returns are randomly selected based on a statistical formula that compares similar returns. Other times, tax returns can be flagged for audit if another taxpayer or business with returns or transactions related to the taxpayer is being audited.
Small businesses are often more likely than wage earners to be selected for an IRS audit, as the complexity of bookkeeping and legal tactics required to run a small business is more likely to result in error than reporting information directly from a W2 form.
It is beneficial to remember, however, that it costs the IRS both time and resources to conduct a tax audit, so it is more likely for them to move forward with a tax audit with an account that is likely to result in more taxes being owed.
How Are Tax Returns Selected For Audit?
The basic filtering process for how federal tax returns are selected for tax audits is as follows:
1. Initial Computer Processing
The first step in which tax returns are evaluated for potential auditing is when they are processed into a computer. The computer then assigns two different scores to the tax return: a DIF score, which assesses possible changes to be made to the tax return, and a UDIF score, which assesses the potential that the taxpayer has failed to report any income on their tax return.
2. Manual Tax Return Examination
After the computer program has assigned scores to the tax returns, an IRS reviewer will manually examine the returns with high scores to determine if they should pursue the case further with an IRS audit.
3. IRS Audit Investigation
Following the manual evaluation of the tax returns, if the IRS reviewer determines that a tax return should be audited, it will be sent to local IRS offices where an IRS agent will begin the auditing process.
All tax returns that were not selected by the IRS reviewer are safe from audit at this step of the process.
How To Check The Status Of Your IRS Audit
The information necessary to check the status of your IRS audit will be available on the original IRS notice letter that was sent in the mail before the audit began. The most effective way to learn the status of your tax audit will be to contact your IRS auditor directly.
Their contact information should have been provided to you in the original IRS audit statement. There may be an instance where your auditor is unavailable, so to prepare for that situation, it may be beneficial to ask your auditor for the contact information of their supervisor as an additional resource.
Another way you can contact the IRS for details about the status of your audit is to call a customer service representative at (800) 829-1040 between the hours of 7:00 AM and 7:00 PM.
What Is The IRS Looking For During A Tax Audit?
The main reason the IRS initiates a tax audit is to search for tax revenue that was not reported on a taxpayer’s federal income tax return, resulting in an underpayment of taxes.
The two forms of these unreported taxes include:
- Understated Income
- Overstated Tax Deductions
How To Prepare For An IRS Tax Audit
Preparing for an IRS audit can not only speed up the timeline for the IRS audit process but can also ensure you are in compliance with tax laws for a seamless and relatively quick audit process.
Some tips for preparing for an IRS tax audit include:
- Planning far ahead of time so that if you are audited, all of your tax records are organized for easy access.
- Improving your accounting systems to ensure you or your business are up to date in your ability to track data in relation to new industry standards.
- Staying up to date with your accounts, such as paying bills and expenses on time, can help you keep up-to-date records of your finances for simple access if you get audited.
- Keeping track of any significant changes in your financial situation or the finances of your business, including having access to all official records documenting these changes, will make it easier to display the findings during IRS examinations.
- Organizing all of your bookkeeping records throughout the year, such as ledgers, bills, checks, budgets, transactions, and more, will put you in the position to easily provide evidence during an IRS dispute.
How Long After Filing Your Tax Return Can You Be Audited?
According to the statute of limitations, taxpayers, including individuals, corporations, partnerships, and non-profit organizations, can be subject to a tax audit up to three years after their federal income tax return was filed.
During a situation where there is a significant understatement of income, however, the IRS can conduct a tax audit up to 6 years after filing a tax return.
Can Tax Audits Impact Tax Refunds?
Due to the fact that IRS audits can begin several months after filing your federal income tax return, it is possible that if you were approved for a tax refund, you may receive that payment before your tax account is selected for an IRS audit.
Even though you may receive payment for your tax refund, if the audit reveals necessary changes to your tax return that result in unpaid tax liability, you may owe the IRS more money.
How Can Tax Professionals Help During An IRS Audit?
If an individual or business has received an IRS audit notice in the mail, onboarding the help of the tax pros can offer them an extreme advantage when negotiating with the IRS and attempting to answer the questions.
While it is possible to navigate the situation without the representation of a certified public accountant (CPA), tax attorney, or another type of tax advocate, if the taxpayer is not well-prepared with all of their documentation, they are at risk of doing something wrong, as IRS auditors are searching for violations of tax laws and disagreements in items reported in their tax records.
Tax professionals who are experienced at communicating with the IRS during a tax audit can support taxpayers through their examination, in addition to offering tips about their rights, providing advice about audit preparation, and optimizing the chance that the result of the audit will be in the taxpayer’s favor.
If you are experiencing an IRS audit and want to utilize the help of an experienced IRS tax attorney, the tax pros at Ideal Tax are here to help you find a resolution. Make an appointment for a free consultation with us today so we can offer you tax advice and explain how you can best optimize your tax debt relief options.
Luis graduated from California State University Fullerton with a B.A. in Political Science. As the Director of Operations at Ideal Tax, he combines years of tax related knowledge with industry expertise, solidifying his prominence in the field.
