Category: Assurance

Understanding the timeframe for IRS audits

Posted on by [email protected]

August 05, 2024 | by Atherton & Associates, LLP

One of the most common questions taxpayers have about IRS audits is, “How far back can the IRS audit me?” Understanding the statute of limitations and the circumstances that may extend this period is crucial for maintaining proper tax records and ensuring compliance.

In this article, we’ll provide an overview of audit timeframes and explain the legal and practical aspects of an IRS audit.

Audit basics

An audit is a review or examination of an individual’s or organization’s financial information and accounts to ensure accuracy in reporting according to tax laws. The purpose of an audit is to verify the reported amount of tax. It does not always suggest a problem; sometimes, it can be a random selection or a computer screening based on a statistical formula.

If you are selected for an audit, the IRS will notify you by mail, not by telephone. The audit can be managed either by mail or through an in-person interview to review your records. The length of an audit varies depending on the complexity of the issues, the availability of information requested, and your agreement or disagreement with the findings.

The general rule: three-year statute of limitations

In most cases, the IRS has up to three years from the date you file your tax return to initiate an audit. This period starts from the date you filed your return (or April 15, whichever is later) to charge you additional taxes. For example, if you filed your 2020 tax return on April 15, 2021, the IRS generally has until April 15, 2024, to audit that return. If you requested an extension and filed your 2020 tax return in October 2021, the IRS would have until October 2024 to audit the return.

In practice, however, the IRS tends to open and close an audit within 26 months after the return was filed or due. This internal policy helps ensure that the audit and other processing needs are completed within the three-year timeframe.

However, these rules aren’t absolute, and the IRS can extend the audit period under certain circumstances.

Exceptions to the three-year rule

While the three-year statute of limitations covers most situations, several exceptions extend this period:

  • Substantial understatement of income: If you underreport your income by more than 25%, the IRS can audit you for up to six years. This rule aims to address significant discrepancies that could indicate tax evasion.

  • Unreported foreign income: If you have unreported income from foreign sources exceeding $5,000, the IRS can audit you for up to six years. This extension is part of the IRS’s efforts to combat offshore tax evasion.

  • Failure to file a return: If you fail to file a tax return, there is no statute of limitations. The IRS can audit you at any time, regardless of how many years have passed since the tax year in question.

  • Fraud or willful evasion: In cases where the IRS suspects fraud or intentional tax evasion, there is also no statute of limitations. The IRS can investigate and audit your returns indefinitely to uncover fraudulent activities.

The timeframe also varies depending on the type of audit conducted by the IRS. Some audits, particularly those focusing on tax credits, start a few months after you file your return. Others, often related to questionable items on your return, generally start within a year after you file. The most comprehensive IRS audits, known as field audits, can start later.

Practical tips for taxpayers

Dealing with the IRS in an audit can be challenging. Here are some practical tips to keep in mind:

  • Maintain records: keep all tax records, including receipts, bank statements, and other relevant documents, for at least seven years. This practice covers you for most audit scenarios, including the six-year extension for substantial underreporting.

  • Accurate reporting: ensure all income is accurately reported on your tax returns. Double-check your numbers and consider professional help if your tax situation is complex.

  • Respond promptly: if you receive an audit notice, respond promptly and provide the requested documentation. Delays or failure to respond can escalate the situation and result in penalties.

  • Professional advice: consult a tax professional if you have concerns about past returns or potential audit risks. They can provide guidance tailored to your specific circumstances.

By understanding the IRS audit timelines and maintaining diligent records, you can reduce the stress and uncertainty associated with potential audits. Keeping accurate and comprehensive documentation not only ensures compliance but also provides peace of mind.

For personalized assistance and to ensure your records are in order, reach out to one of our professional advisors. We can help you navigate complex tax laws and stay compliant and prepared for any IRS inquiries.

Let’s Talk!

Call us at (209) 577-4800 or fill out the form below and we’ll contact you to discuss your specific situation.

  • Should be Empty:
  • Topic Name:

The IRS’s new audit strategy: what wealthy individuals, corporations, and complex partnerships need to know

Posted on by [email protected]

June 17, 2024 | by Atherton & Associates, LLP

The IRS’s newly unveiled strategic operating plan is set to reshape the landscape for wealthy individuals, large corporations, and complex partnerships. By 2026, audit rates for these groups are projected to rise significantly.

It’s important to understand and prepare for a more rigorous audit environment to safeguard your financial interests and ensure compliance with the evolving standards. In this article, we’ll provide insights and strategies to manage the impending changes.

Breaking down the IRS’s new audit plan

The strategic operating plan reflects the IRS’s enhanced capacity, driven by increased funding and resources, to address historically low audit rates among the wealthy. Here are the key points of the plan:

Wealthy individuals with income over $10 million

By 2026, individuals with income exceeding $10 million will experience a 50% increase in audit rates. While this sounds substantial, it’s important to note that the current audit rate for this group is relatively low. In 2019, only 11% of wealthy individuals faced audits. Under the new plan, this rate will rise to 16.5%, reflecting the IRS’s intensified focus on high-income earners who may have complex tax situations.

Large corporations with assets over $250 million

Large corporations are set to face a threefold increase in audits by 2026. Companies with assets exceeding $250 million will see their audit rates rise dramatically from 8.8% in 2019 to 22.6% in 2026. This shift underscores the IRS’s commitment to ensuring that large entities adhere to tax laws and accurately report their financial activities.

Complex partnerships with assets over $10 million

Complex partnerships are also on the IRS’s radar, with audit rates expected to increase tenfold by 2026. Partnerships with assets over $10 million will see their audit rates jump from a mere 0.1% in 2019 to 1% in 2026.

While these projected increases may seem daunting, it’s crucial to recognize that they come after years of relatively low audit activity due to budget constraints and limited manpower. The IRS’s enhanced resources now allow it to more effectively target these groups, ensuring compliance and closing the tax gap. Understanding these changes and preparing accordingly will be essential for those affected.

Actionable steps for those facing increased audit rates

With the IRS’s strategic plan set to increase audit rates, it’s crucial for those in the targeted groups to take proactive measures to mitigate audit risks. While these steps are not exhaustive or individualized, they offer a solid starting point for those facing increased audit risks:

  • Maintain thorough documentation. Ensure all income, deductions, and credits are well-documented. Keep meticulous records of all financial transactions and supporting documents.

  • Review past returns. Conduct a thorough review of past tax returns to identify and correct any potential errors or omissions. This can help prevent issues during an audit.

  • Conduct internal audits. Businesses should regularly perform internal audits to ensure compliance with tax laws and regulations. This can help identify and rectify any discrepancies before an IRS audit.

  • Implement robust accounting systems. Invest in advanced accounting and reporting systems to ensure accurate and transparent financial records. This will make it easier to provide necessary documentation during an audit.

  • Stay informed on tax law changes. Keep abreast of changes in tax laws and regulations that may affect you or your business. Ensure your tax strategies are aligned with current laws to avoid potential issues.

  • Regularly review partnership agreements. Ensure that partnership agreements are up-to-date and clearly define each partner’s responsibilities and tax obligations. This can help prevent disputes and confusion during an audit.

  • Respond promptly to IRS inquiries. If you receive an audit notice or any inquiry from the IRS, respond promptly and provide the requested information. Delays can lead to further scrutiny and complications. If you receive an audit notice or any inquiry from the IRS, respond promptly and provide the requested information. Delays can lead to further scrutiny and complications. If you receive any notices or inquiries from the IRS, contact our office for help with a response.

Preparing for the future

This article provides a brief overview of the upcoming changes in the IRS’s strategic operating plan and outlines some basic steps to consider. It is important to note that these recommendations are not exhaustive. For personalized advice and comprehensive guidance, please contact our office.

Let’s Talk!

Call us at (209) 577-4800 or fill out the form below and we’ll contact you to discuss your specific situation.

  • Should be Empty:
  • Topic Name:

IRS releases plan to triple its audit rates on large corporations

Posted on by [email protected]

May 03, 2024 | by RSM US LLP

Executive summary: The IRS has released its annual update, in which it pledges to triple its audit rates on large corporations.

The update states that the IRS will nearly triple audit rates on large corporations—those with assets over $250 million. The audit rate on such corporations was 8.8% in 2019. Under the plan, the audit rate would be 22.6% by 2026. Audit rates on other large business entities would increase exponentially as well. Large corporations should take note of the IRS’s increased audit focus and document any tax position or corporate transaction that might be questioned upon audit.

On May 2, 2024, the IRS released an update on the Strategic Operating Plan, its blueprint outlining its implementation of the Inflation Reduction Act (IRA). The annual update and accompanying supplement focus on recent and future contemplated changes as a result of the funding provided by the IRA.

Per the updated plan, the IRS will nearly triple audit rates on large corporations—those with assets over $250 million. The audit rate on such corporations was 8.8% in 2019. The IRS plans to increase audit rates on these corporations to 22.6% by 2026.

The updated plan also states the IRS will increase audit rates on large, complex partnerships to 1%, up from a tenth of a percent. The IRS will also increase audits on individuals earning more than $10 million—from a rate of 11% in 2019 to 16.5% in 2026.

Large corporations—as well as other large business entities—should take note of the IRS’s increased audit focus. Due to the increased probability of an audit, we recommend that taxpayers contemporaneously document any tax position or corporate transaction that might be questioned upon audit.

Let’s Talk!

Call us at (209) 577-4800 or fill out the form below and we’ll contact you to discuss your specific situation.

  • Should be Empty:
  • Topic Name:

This article was written by Patrick Phillips, Joseph Wiener and originally appeared on 2024-05-03. Reprinted with permission from RSM US LLP.
© 2024 RSM US LLP. All rights reserved. https://rsmus.com/insights/services/business-tax/irs-releases-plan-triple-audit-rates-large-corporations.html

RSM US LLP is a limited liability partnership and the U.S. member firm of RSM International, a global network of independent assurance, tax and consulting firms. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmus.com/about for more information regarding RSM US LLP and RSM International.

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.