IRS Audit News

One of the worst kept secrets about the Internal Revenue Service is that their computer systems are old, very old. In fact, the IRS was one of the first major institutions to implement and use computers on a large scale back in the 1960s. Unfortunately for them, and fortunately for many taxpayers, the IRS still uses computer systems that are backward compatible to some of those archaic systems. As such, and due to a general lack of funding, the IRS’s computers are significantly less advanced than most modern banks, businesses, and government agencies.

On August 16, 2022, President Biden signed the Inflation Reduction Act into the law, giving the IRS an additional $80 billion for audits and enforcement.  The President and other political leaders promised that the new funding would only be used to go after the super-wealthy.  However, the President’s promise ignores one key fact: the IRS does not know who is, and who is not wealthy until after the audit.  

What is an IRS Audit?

An IRS audit is an examination of an organization’s or individual’s accounts and financial information to check that the information was reported properly and in conformity with the tax laws.

At the conclusion of the audit, the taxpayer will receive an official decision from the IRS. The taxpayer has several choices regarding how to respond to the IRS official decision, depending on the type of decision the IRS issues.

The IRS can tax individuals based on what is classified as taxable income. In general, most income that an individual earns is considered taxable income by the IRS and one of the primary considerations in an IRS audit is whether all taxable income has been properly reported.

The Statute of Limitations on an IRS Audit

Generally, the IRS can include returns filed within the last three years in an audit.  According to information contained on the IRS website, the IRS tries to audit tax returns as soon as possible after they are filed. This means that most IRS audits will be of returns filed within the last two years.

As a taxpayer, you have certain rights that must be protected by the IRS during the course of an IRS audit.

How Does the IRS Determine the Scope of the Audit?

The IRS examiner performing the audit will select items that are worthy of examination. In selecting items for examination, the IRS examiner will choose items on the taxpayer’s tax return so that, with reasonable certainty, all items necessary for a substantially proper determination of tax liability can be considered.

In rare cases, the IRS may decide to audit a taxpayer’s return more than once. The reopening of a closed case is typically unfavorable to the taxpayer.

At the conclusion of the IRS audit, you will receive communication from the IRS regarding the auditor’s findings. Depending on the audit’s findings and how you wish to proceed, you have several options.