The Internal Revenue Service is struggling to rebuild. Unprocessed tax returns and a historic backlog plagued the IRS in 2021. For many, filing income tax returns for the last two years has been complicated work.
For the IRS employees tasked with processing tax returns — even more complex. Now though, the IRS says $1.5 billion in refunds are waiting to be claimed. What happens if you get selected for an audit, though?
How many audits were completed in 2021?
The Internal Revenue Service has processed more than 78.8 million income tax returns as of March 25. The agency says that upwards of 58 million refunds have been processed to date.
But the agency is already facing a backlog. Last year, the IRS closed more than 452,515 audits for 2020. That’s less than one-third of a percentage point of all people who filed taxes.
John Apisa, a CPA and partner at PKF O’Connor Davies LLP, who spoke with CNBC recently said many play ‘audit lottery’.
“Some people play the audit lottery, meaning they’ll do whatever they want and know that the chances of getting caught are slim,” he explained. “That’s not a good philosophy to have, though.”
How long does the IRS have to audit you?
There’s a three year statute of limitations on audits, but exceptions can be made on a case-by-case basis. That said, fraud and non-filers can be audited at any time after the income tax return is filed.
Experts say the best course of action is to save your records — and be thorough when filing tax returns. Like many businesses and industries in 2022 — the IRS uses software to gauge whether an audit is necessary.
What does the IRS look for in potential audit cases?
The IRS is using software — or an algorithm — to determine what returns most necessitate an audit. The system looks at tax credits, deductions, and other write-offs.
For example, if a person has $100,000 in annual income, but made $60,000 in charitable donations — the system would likely alarm an employee at the IRS. Even then, it doesn’t guarantee that a person will be audited.
One of the biggest reasons filers get flagged for audit are write-offs. The earned income tax credit is one watched closely by IRS employees. The advance child tax credit is another example.
What are the best steps to take to avoid an audit?
Remember, very few people actually get audited. But experts agree that no matter how little the risk — it’s worth taking some basic steps to ensure you’re protected if the day comes.
- Report income precisely.
- Save all receipts relevant to your return.
- Keep tax records for at least 7 years.
- Talk to a tax professional about your income tax situation.
- If you have major swings in total income, be sure to save even more documentation.