Before We Get Started, See How Much You May Know About Taxes & Take The Tax Quiz Below!
Compare how long the US Tax Code is in comparison to the Bible at around 1600 pages long, and you’ll understand why people have a lot of questions about the IRS and its tax code. It’s not like people have disagreed about the Bible for the past 2000 years.
The US Government tax code is so complicated that it requires an extra 70,000 pages to explain what’s in it. Who has time to pour over all that?!
Fortunately, there are tax attorneys and experts who know how to parse those pages. And not every little tax situation and detail applies to you.
Today, we’re going answer a few of the most common IRS questions including “How far back can the IRS audit?”
Let’s get down to it
Question 1: Just How Many Years Back Can the IRS Audit Me?
Just because you filed your return and weren’t audited last year, doesn’t mean the previous year can’t be audited this year. Sound fair? We don’t think so either, but it’s the IRS. So, what can you do?
The thing is, the Internal Revenue Service is all about making money for the government. They’re also a massive bureaucracy. This means they could easily miss a mistake or one hundred on your tax filing.
They’ve built in some leeway into their code for their tax agents. If you filed as far back as six years ago and they catch an error this year, they could go back and audit every single year.
Now, the IRS claims they’ll likely only check the last two years. It all depends on their suspicion of how much you’ll owe from previous years. If they suspect you’ve been hiding revenue from the last six years, they’ll likely audit as far back as they see fit.
The IRS audits as soon as possible after you’ve filed taxes. And they want the audit resolved quickly. There are times the IRS has been known to extend their statute of limitation. This usually happens when they need more time for a full audit.
You don’t have to agree to the extension. But this also means the auditor is going off of incomplete information when filing your audit. You don’t know how much the auditor knows so ask yourself, do you want to gamble with your taxes?
There is understandable concern regarding how far back the IRS can look when auditing tax returns. While generally the IRS can look back three years after a filing during an audit, there are many exceptions to this rule.
The statutes of limitations
The three-year statute of limitations can become six years if there is an omission to report over 25 percent of one’s income on a tax return. The IRS interprets such an omission as being much more than not reporting income on a return. Any reporting “that has the effect of an omission of income” can trigger a six-year statute of limitations period.
Such an interpretation is controversial. For example, not too long ago the U.S. Supreme Court ruled that overstating one’s basis on investment property would not be an omission concerning reportage of income. However, despite the court’s decision, Congress at a later date decided to give the IRS a six-year statute of limitations period when such an overstatement of basis occurred. The IRS can also use this six-year limitations period concerning omissions in reporting over $5,000 in foreign income. And there are many instances when this time period can be much longer. In fact, there is no time period whatsoever regarding fraudulent filings or the failure to file a return.
The IRS has incredible power when it comes to enforcement of tax laws, and such enforcement can apply to statute of limitations laws as well. For instance, there can be circumstances where the IRS will ask US taxpayers to provide written permission to extend the statute of limitations. The failure to sign such a form could mean the IRS will serve the taxpayer with an assessment.
Question 2: What Happens If I Disagree With My Tax Audit?
When you get audited, you have three choices:
- Ignore it, hoping it will go away.
- Pay it.
- Fight it.
We definitely don’t recommend the first response.
The most expedient answer is to pay what the government says you owe. But, what if you don’t agree with the findings?
The IRS calls their audits “examinations.” They certainly feel like a slap on the wrist by your third -grade teacher. But while your third-grade teacher could do no wrong, the IRS can make mistakes.
If you notice a mistake in your tax audit, you have the right to appeal the findings. You can appeal most any tax finding including liens, levies, offer rejections, penalties, or tax liability adjustments.
If you disagree with your examination report, make sure you write and submit your disagreement on time. Make sure you jot down the be a deadline listed in the report.
- Write a protest letter
- Sign it
- Mail it to the IRS before the deadline
Copy your letter before you send it and mail it in person at the post office to get a receipt. The mail system isn’t always reliable, and if it doesn’t show up by the deadline, you need proof you wrote and sent the letter.
If you send the letter on time, the IRS will transfer your case to the IRS Appeals Division.
What Happens at the IRS Appeals Division?
The Appeals Division is a nationwide network of offices. Your case will go to the closest office to your location.
This gives the IRS the ability to quickly deal with your case in person if they need to. This works in your favor. Because now you can talk in person to your Appeals Officer and hire a tax lawyer to represent you. A tax lawyer will help you work out compromises with the appeal office.
You can deal with the appeals process by yourself, but we wouldn’t recommend this. Like attempting to represent yourself in court, this method generally isn’t successful.
What Happens If I Missed the Deadline to Respond?
It’s possible to get an extension for the time to respond. But if you missed your deadline, it’s going to be difficult to appeal your case.
If you think you need more time to hire a lawyer or review the case with a professional before responding, request an extension. Be sure to reply by mail with a written request.
However, you cannot request an extension for certain notices, including the Notices of Deficiency. Be sure you know when you can request extra time. Don’t just assume.
Question 3: What Happens if I Can’t Afford to Pay the IRS?
First thing is first, file your tax return regardless.
If you try to hide your money, the IRS will eventually find out. That’s true especially if you will likely owe a lot of money.
The IRS wants their money, just like any other business. The good thing is that they’re willing to work with you to get the money. This means the IRS allows payment options!
Some people rely on these payment options every year instead of paying throughout the year. We don’t recommend this route in every situation, but it is an option that we can help you with.
It’s important to keep in mind that possible penalties exist for those who opt for payment options. You’ll likely owe interest as well. These fees and penalties are different for each payment option and each individual situation.
Question 4: Should I take the Standard Tax Deduction or Itemize?
The Tax Cuts and Jobs Act doubled the standard deduction while eliminating the personal exemptions clause. Is this good or bad news? Well, it depends on how much you usually deduct from your taxable income each year.
When you take the standard deduction, you’re saying that you can’t deduct more than the standard deduction rate for your category. For people filing as single or married and filing separate, the new standard deduction is $12,000.
If you’re married and filing jointly, it’s $24,000. If you’re filing your taxes as head of household (meaning your spouse doesn’t work), you can claim $24,000.
If you take the itemization route, you need to have more deductions to claim the standard deduction amount. If you’re doing taxes, add up all your planned deductions and compare them to the standard deduction.
If they are less than the standard deduction for yourself, take the standard deduction (it’s easier to file this way).
If you see that the number is larger than the standard deduction, go ahead and itemize.
Question 5: What Income Do I Have to Pay Taxes On?
You might think that income means the money you make in your 9-5 job. Unfortunately, the IRS doesn’t always see it that way. They use a harsh little term called tax evasion.
For example, proponents of cryptocurrency thought they could get away with mining currency without getting taxed for it. At first, they were right; the IRS hadn’t caught up with technology yet. But once the IRS caught on, they shoved crypto under the capital gains tax usually filed on stocks and bonds.
Property and services can fall under taxable income as well. Make sure you know exactly which assets of yours are considered taxable.
Be aware that some non-taxable income needs to be reported as well, and within the time limit – try to stay away from filing late. You won’t pay taxes on it, but it will affect other aspects of your tax return.
Unearned income, including Social Security benefits and child support isn’t taxable under payroll taxes. Unfortunately, they are taxable under federal and state tax law.
The IRS has a list of what is taxable and what isn’t in IRS Publication 525. Unsure about what to include in tax filings? Consult a tax attorney.
Question 6: Do I Have to File a Tax Return?
The answer is almost always YES.
But, that doesn’t mean everyone has to file a tax return.
For example, if you’re a dependent (your parents claim you on their taxes), you don’t have to file a tax return. Other factors affect whether you have to file or not including filing status, gross income, and age.
For many people, gross income is the main reason for filing. For example, in 2017, single people 65 years of age or younger had a filing threshold of $10,400. For those married and filing jointly and 65 or younger, it was $20,800.
Some dependents do have to file. There are several factors to consider. To find out more, check out the IRS Publication 501 for details.
If you have more than $400 in self-employment earnings, you’ll have to file. There are requirements for filing such as untaxed tips and money from tax-exempt churches or alternative minimum taxes.
Question 7: How Do I Know What Tax Bracket I Fit Into?
The U.S. progressive tax system has been in the news a lot lately. Politicians make blanket statements about high percentage taxes that will likely not apply to most of us. Taxpayers then get confused. And rightly so. But what you get taxed depends on many factors such as how much you earn and how much you give away.
Under the current tax law, there are seven tax brackets. Each bracket covers a range of incomes. For example, if you make between $9,525 and $38,700, you only get taxed at most 12% of your income.
But, what most people don’t realize is that tax brackets are more complicated than a simple bracket system. If you made more than $38,700 in 2020, you get taxed 12% on the first $38,700 and then get taxed 22% on anything up to $82,500. The highest tax bracket right now is 37%, but people making 500,000 or more aren’t getting taxed a flat 37%.
If you need to figure out your tax brackets, the IRS has a handy worksheet.
Question 8: What’s the Difference Between Tax Credits & Tax Deductions?
We’ve seen a lot of confusion over the past year about what a tax credit and a tax deduction might be. Any way you slice it, paying less to the IRS is excellent, but there is a difference in how you pay less on your taxes. Sound confusing? It’s not as weird as it sounds.
For example, the money you make isn’t always the money you get taxed on. Deductions will affect your taxable income. Before the IRS decides what you owe then, they apply certain conditions to lessen your tax burden.
Credits are precisely what they sound like. A dollar-for-dollar reduction in how much you owe after deductions is a tax credit.
If you earned $30,000 last year and you had a deduction of $1,000, your taxable income would be $29,000. If your tax rate were a flat 20%, you would save $200.
A tax credit of $1000 gets applied after deductions and after calculating what you might owe. So, if you owe $4,000 in taxes this year, a $1,000 tax credit will save you exactly $1,000. Thus a tax credit is superior in some ways than a tax deduction.
The Good News: Taxes & Tax Refunds Aren’t Impossible.
While the tax code is long, complicated and, quite frankly, boring to read, it’s not impossible to follow for a tax professional. While it’s not impossible to do your taxes yourself, it’s easy to make mistakes. It’s always smart to consult with professional tax attorneys who have experience in dealing with the IRS.
Questions like “How far back can the IRS audit?” will inevitably come up. While the IRS is an excellent resource for taxpayers, it can be challenging to sift through all the information.
Our tax attorneys are available 24 hours a day, seven days a week to help you solve your tax problems and provide tax advice. Even if the IRS decides to audit you from years prior, contact us before you appeal to ensure you start the process correctly.