How Far Back Can the IRS Audit Your Business in 2024?

How Far Back Your Business Stands Under Scrutiny in 2024

Introduction

Anybody fears being audited by the IRS. An IRS audit involves looking over and reviewing a person's or company's financial records to make sure you're complying with tax regulations, reporting accurately, and submitting the right amount of taxes. Put otherwise, the IRS is verifying your data again to ensure your return is discrepancies-free.

Tax audits are also done to ensure no tax avoidance/evasion. If you are telling the truth, there is nothing intrinsically evil about a state or IRS audit. On the other hand, there is cause for concern for those who intentionally manipulate the system. The IRS frequently singles out taxpayers for questionable behaviour/suspicious activity. The IRS will impose additional tax and any associated interest and penalties if the audit finds an underpayment.

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What triggers an audit?

The majority of audits are conducted at random. However, some tax issues can prompt an IRS audit.

Typical IRS audit triggers include:

Not Disclosing Complete Taxable Income

Copies of your W-2s and 1099s are sent to the IRS. The IRS may ask for a review if you still need to include a 1099 on your tax return. Should you observe anything unusual on your W-2s or 1099s or obtain a 1099 that is not yours, promptly notify the issuer and request that they forward a corrected copy to the IRS.

High-Net-Worth Individuals

The likelihood of an audit is significantly higher for wealthy individuals than for low earners. The IRS claims that people making $10 million yearly have a much higher chance of being audited.

Large Deductions For Charity Contributions

It is easy to prove the value of a donation when you write a cheque to charity. One factor that could trigger a tax audit is the taxpayer's incorrect estimation. If you wish to donate an item valed at $500 or more, have a qualified appraiser assess the fair market value of that item.

Excessive Deductions

The IRS knows the typical deductions for specific items taxpayers claim in your income bracket. If you go above these averages, the IRS might look into it. Do not hesitate to claim the deductions you are entitled to, provided they are legal and properly documented.

Filing Schedule C

Compared to salaried employees, self-employed taxpayers are more susceptible to audits. The IRS knows salaried taxpayers have fewer opportunities than self-employed to conceal income and commit tax fraud. Additionally, self-employed individuals are subject to audits more frequently due to the IRS's generous tax incentives/benefits, which leaves the possibility for abuse.

Home Office Deductions

The criteria for the home office deduction are stringent. Only eligible independent contractors and self-employed taxpayers may claim this deduction. The primary place of business must be the homeowner's house, with a specific area designated for commercial purposes. Workers who operate remotely from their homes are not entitled to the deduction for a home office.

Earned Income Tax Credit

Audit rates for returns that claim the Earned Income Tax Credit are much higher. Most low-income and rural taxpayers file Earned Income Tax Credit (EITC) claims. It helps families and people with low to moderate incomes pay less taxes.

Being Associated With Someone Who The IRS is investigating

If a linked party, like your business partner, is already the subject of an IRS audit, you will probably be targeted for one.

Mathematical Errors

Even while math mistakes might seem simple, they can make a reviewer more cautious. Even though it might have been an unintentional error on your part, auditors may nonetheless investigate you. Thus, exercise caution.

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How far back can the IRS audit?

The general statute of limitations is three years. The IRS often seeks to audit tax returns as soon as possible after they are submitted. Therefore, most audits are carried out on returns filed within the past two years. The extended statute of limitations is six years.

If the Internal Revenue Service determines that a return has "substantial omissions," the statute of limitations is extended from 3 to 6 years. The extended statute of limitations applies when:

  • Over 25% of gross revenue is underreported.
  • Income from unreported overseas financial assets is omitted from a return to the extent that it exceeds $5,000.

The audit period may become indefinite, and the IRS audit statute of limitations will not apply if you:

  • Have never filed a tax return;
  • Forgot to sign your tax return;
  • Filed fraudulent returns in the past.

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What do I need to provide in an audit?

The IRS will send you a list of the necessary documents for the audit. It could ask for specific documentation to back up your claimed credits, deductions, and reported income:

These documents may consist of:

  • Dated receipts accompanied by remarks on the purpose and connection to your business;
  • Bills with the recipient's name and the dates of payment specified;
  • Cancelled cheques
  • Legal documents
  • Loan agreements
  • Receipts

Our special Inkle Tax software lets you safely keep confidential company documents in a secure integrated vault dedicated to document storage. As the law requires, you must retain document records for at least three years.

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Conclusion

Instead of living in constant fear of an audit, small business owners should make an effort to keep meticulous, well-organised records of all of their receipts and outlays, including records and paperwork about taxes. Easy access to the necessary paperwork will provide you peace of mind in the unlikely event that you receive notice from the IRS to audit your returns.

An IRS audit typically is not a criminal investigation. If an IRS agent finds what appears to be fraud on an income tax return, they may launch a criminal inquiry. To ascertain whether tax or financial fraud has occurred, special agents of the IRS Criminal Investigation Division are tasked with reviewing these potential instances. Whether or not the IRS launches a criminal investigation is usually determined by the scope and severity of the alleged fraud.ย 

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