How Far Back Are Returns Audited by the IRS?
One of the most frightening prospects for any American taxpayer is the possibility of being audited by the IRS. Although the presence or amount of certain deductions may increase your chances of being audited, there is no sure way to avoid having your tax return selected for audit. Knowing when and why the IRS decides to audit can take some of the worry out of filing your income tax returns.
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Reasons for Audits
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There are many reasons your tax return may be chosen by the IRS for audit in any given year. Certain deduction types are watched more closely than others from one year to the next, but the IRS doesn't usually disclose in advance which ones will be targeted. Each tax return is scored by computer for audit potential as it is processed, with a number assigned to each form and/or section used. If your return scores high enough, it goes to the potential audit pile. Wide variations in your deductions from one year to the next or a deduction much larger than the national average can attract the attention of the IRS. But there are also completely random audits conducted each year, based on nothing more than the luck of the draw.
What to Claim
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Claim all income and all legitimate deductions on your tax returns. It is pointless to try to dodge an audit, so don't try to keep your deductions low or forgo using a certain form. You might be lucky enough to outguess the IRS once in a while, but chances are good that you'll simply end up paying higher taxes in your attempt to avoid triggering an audit.
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How Long to Keep Records
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The best way to protect yourself against penalties that might be incurred in an IRS audit is to keep copies of your tax returns and all supporting documentation. Although most audits begin within about two years, every tax return is "open" for review or amendment for three years after its due date or when it is filed, whichever is later. The IRS can audit or question any item for any reason within that time period. All related receipts should be kept for the entire "open" period at a minimum. However, if the IRS can show a fraudulent pattern exists in the open years, auditors can reopen previous years' tax returns for examination as well.
What to Keep
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Keep a copy of your tax return, and all related materials used to compile it, for at least four years after you file the return. If you have receipts for potential deductions that you decide not to use, or if you later find receipts for items you didn't deduct, tuck them into a separate envelope and keep them with your tax papers. The IRS will assess penalties and interest retroactive to the due date of the tax return, based on the amount of additional tax you owe as a result of an audit. If a deduction is disallowed, you can produce the previously unused receipts to claim new deductions that could keep you from having a balance due, thereby saving yourself hundreds or even thousands of dollars in penalties and interest.
File Your Return
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Remember, the clock doesn't start ticking until a tax return is actually filed. If you neglect to file one or more tax returns, those years remain open to IRS collection action forever.
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