What Is an IRS Audit and Who Gets Audited? What You Need to Know – CNET

Getting a letter in the mail from the Internal Revenue Service is not something many people look forward to. Usually it’s because they’re nervous about getting audited by the IRS. However, there are many misconceptions about what an audit truly is and who gets audited. 

The IRS received a huge financial boost as part of the 2022 Inflation Reduction Act that gives the agency an additional $80 billion over the span of 10 years, which is projected to increase federal tax revenue by over $200 billion. More than half those funds will be directed toward enforcement, according to accounting firm PricewaterhouseCoopers, which says the IRS is expected “to substantially increase examinations of large corporations, partnerships and high-wealth individuals.”

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IRS commissioner nominee Danny Werfel at his Senate Finance Committee nomination hearing.

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Is there racial bias in who gets audited by the IRS? 

Black taxpayers are disproportionately likely to be audited, according to a Stanford University report released in January. The research team found that Black taxpayers receive audit notices at least three times more often than non-Black taxpayers.

Depending on their income, household size and filing status, they may be as much as 4.7 times more likely to be audited.
Stanford law professor Daniel Ho, who led the research, said the disparity likely isn’t intentional but the result of cost-cutting measures and the secret algorithm governing the IRS’ audit selection methods.
Budget cuts have cost the agency more than 20% of its examiners over the past 10 or more years, according to Ho’s team, many of whom had the necessary expertise to investigate more complex tax issues. As a result, audit rates among higher tax brackets have declined while those for lower-income taxpayers haven’t.  
The IRS is also leaning into correspondence audits, which are “easy to trigger, cost very little and require minimal effort by IRS personnel,” compared to in-person field audits, the researchers said. Some 70% percent of IRS audits are through the mail.
The researchers found the program the IRS uses to flag problems on returns and generate automated letters, the Dependent Database, tends to home in on errors involving eligibility for money back rather than on mistakes related to high-dollar amounts.
Half of all IRS audits, for example, involve taxpayers claiming the earned income tax credit.  

According to Ho’s team, EITC-related audits are more likely to hit “lower-income individuals whose tax returns are less complex and less likely to lead to litigation.”

The program is also likely to target claimants with no business income because they are cheaper and easier to resolve. 
Black taxpayers make up only 10% of EITC claimants reporting business income, the report found, but 20% of EITC claimants who do not.

 “Racial disparities in income are well known, and what the IRS chooses to focus on has big implications for whether audits complement, or undercut, a progressive tax system,” Ho said in a statement.

These factors don’t account for the full disparity in who gets audited, the researchers said. Black taxpayers make up 21% of EITC claimants, for example, but were the focus of 43% of EITC-related audits.

The inconsistency persists regardless of gender, and marital or parental status, but is most pronounced among single Black men with dependents who claim the EITC. They’re nearly 20 times more likely to be audited as a non-Black couple filing jointly and claiming the same credit.
The researchers said they believe the IRS is also under pressure by lawmakers to go after individuals unduly receiving a refund over people committing tax evasion.
Filers claiming the EITC can receive a refund even if they paid no taxes that year. 

“We’re not treating the dollar that is going toward the earned income tax credit as the same dollar that might be evaded by a high-income taxpayer,” Ho told USA Today. “If we treated those similarly, our evidence shows that the disparity would go down significantly.”

How far back can the IRS go to audit a return?

Generally, the IRS will include returns filed within the last three years in an audit, with most audits of returns from the last two.
“If we identify a substantial error, we may add additional years,” according to the agency’s website, which adds it doesn’t usually don’t go back more than the last six years.
If an audit is not resolved, the IRS may request extending the statute of limitations for assessing additional taxes and fees, which is usually three years after a return was due or was filed, whichever is later.
The auditee doesn’t have to agree to the extension of the statute of limitations date, according to the IRS. “However if you don’t agree, the auditor will be forced to make a determination based upon the information provided.”

How long should you hold onto tax records? 

Since the IRS typically looks at returns from the past three years, it’s a good rule of thumb to hold onto your records for at least that long.
Six or seven years is fine if you really want to cover your bases, Willetts said.
The government has six years to claim revenue or start legal proceedings if your return included a “substantial understatement of income,” which, according to the American Bar Association, is at least 25% of your gross income. Although if the IRS makes the case you were intentionally committing tax fraud, that six-year deadline doesn’t apply.

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