Can The IRS Audit You More Than Once?
Zach is a small business owner based in Kansas City. He incorporated his business in 2016. In the first few years of operation, he took the advice of an inexperienced tax preparer and his 2017 tax return was audited by the IRS. Since the audit, he has worked with the IRS to reconcile his return and he now takes every measure to comply with accounting best practices, including switching tax preparers. Yet the question “Can I get audited twice?” burns fiercely in his mind.
Can the IRS Audit Zach Again?
Well, Zach’s won’t have much peace of mind in that regard. The IRS can audit him year after year. According to Internal Revenue Code §7605(b), the IRS can’t subject a taxpayer to unnecessary examinations. Andrew Phillips, JD, LLM, the Director of Tax Research at The Tax Institute states, “The IRS can conduct only one inspection of a taxpayer’s books and records for any given year unless the taxpayer requests a second inspection or the IRS notifies the taxpayer in writing that an additional inspection is necessary.
A repetitive audit occurs when the IRS has already examined the same items on a return in either of the two previous years, and the previous audit resulted in no changes or only a nominal change to the return. The IRS issued an Internal Revenue Manual policy for terminating repetitive audits. For taxpayers and tax advisors, invoking this policy may help avoid a full-scale audit if the IRS is taking up the same issues in a subsequent audit.
While this statute and policy protects taxpayers (for the most part) from multiple audits in one year, it doesn’t limit audits from one year to the next… especially when a return has multiple red flags.
Oops… What if Zach Was Audited By The IRS Twice in One Year?
What if Zach was audited twice by the IRS for his 2017 return? As soon as Zach receives the IRS notice explaining that he is being audited again, he should…
Request that the IRS discontinue the audit (using the contact information on the notice received).
He should reference the IRS’ repetitive audit policy in his request. When he makes the request, he should be aware that the IRS is going to ask for certain information to help determine whether the repetitive audit policy applies. The IRS will generally request:
- The prior year’s audit report or no-change letter,
- Verification of where Zach filed the return(s) in question, and
- Verification of where the IRS completed the prior-year examination(s).
If Zach makes the request before his first scheduled meeting with the examiner, the IRS will generally determine whether the policy applies before any meetings begin.
Best Practices to Avoid an IRS Audit
Take the following precautions to reduce the likelihood of multiple audits year after year:
1) Steer clear of IRS red flags:
- You report income information that doesn’t match your payee statements (like W-2s or 1099s).
- You show deductions on your return that are disproportionately large compared to your income.
- You are a cash-intensive business or small business owner who reports a substantial net loss on a Schedule C.
- Your charitable non-cash donations are over $500 and are disproportionate to your overall taxable income.
- You run a business at a loss for several consecutive years.
- You have large business write-offs for your automobile, entertainment, travel, and food, especially if the amount seems too high for the business or profession.
2) Partner with the right tax advisor—especially if you have a complex tax situation.
It’s easier and less stressful to stay ahead of the curve and choose a Tax Advisor who has experience with completing an individual or business’ taxes. Vet a handful of advisors by asking them these five questions. And, it’s important to find a Tax Advisor who will represent you during an IRS audit.
While there are many options out there when it comes to tax preparation and year-round tax and business services, consider Block Advisors, where each Tax Advisor has an average of 15 years of experience.
Book an appointment year-round, now.