Being audited during tax time is likely a situation you hope never to have to deal with. While you might assume that you can't be audited if you've already received money back from your taxes, that's a misconception.

In reality, the U.S. Internal Revenue Service (IRS) can audit tax returns even after it has issued a tax refund to a taxpayer. According to the statute of limitations, the IRS can audit tax returns filed within the previous three years. In certain instances when a significant error is identified, the IRS can audit returns filed even further back than that but typically no more than the previous six calendar years.

Key Takeaways

  • Your tax returns can be audited after you've been issued a refund.
  • Only a relatively small percentage of U.S. taxpayer returns are audited each year.
  • The IRS can audit returns for up to three prior tax years and in some cases, go back even further.
  • If an audit results in increased tax liability, you may also be subject to penalties and interest.
  • Reviewing your return carefully before filing can help to minimize the odds of being audited.

What Is a Tax Audit?

Every year, the IRS selects numerous tax returns for audits. This process essentially involves having your return inspected by an IRS representative. The person checking your return may be looking for errors or discrepancies that might have caused you to underpay your taxes. Audits can also be requested if tax fraud is suspected.

Tax returns can be selected for an audit regardless of whether a taxpayer has been issued a refund or has a tax liability, as long as the IRS identifies a tax mistake or fraud. Tax returns for audits are typically chosen based on random selection. According to the IRS, approximately 1 million returns, or 0.5% of all returns filed, were chosen for an audit for the 2017 calendar year. So, your odds of being targeted for an audit are fairly low.

In terms of what the audit involves, the IRS compares your return to a similar "norm" group of returns using a statistical formula to check for errors or discrepancies. Other methodologies the IRS uses to select returns for audits include related examination and matching documents. The IRS conducts its tax audits by email or through personal interviews at a local IRS office. In the 2018 fiscal year, nearly 75% of audits were conducted by correspondence while 25% were conducted in the field.

What Can Trigger a Tax Audit?

The IRS doesn't specify exactly why it chooses some returns for audits and not others. Again, it's worth noting that some selections are made completely at random, meaning you could have a perfectly accurate return and still be audited.

But if you're wondering what might increase your odds of being audited, here are some common red flags that could lead the IRS to take a closer look at your return:

Earning a higher income. Being a higher earner could work against you at tax time if the IRS suspects that you're trying to cut corners and minimize your tax liability. For the 2018 fiscal year, taxpayers earning $1 million or more had a much higher chance of being audited compared to those earning less than $1 million.

Failing to report all of your income. If you work as an independent contractor, received gambling or lottery winnings in the previous year or experienced another income windfall, failing to report those things on your return could trigger an audit.

Important

If you fail to report any income at the time you file your return, you should file an amended return as soon as possible. You'll need to pay any taxes due but this can help you avoid penalties and interest.

Excessive deductions. Taking deductions can help to reduce your taxable income for the year and potentially increase your refund. But if you're taking deductions (or tax credits) you aren't entitled to or your deductions seem abnormally high, that might prompt the IRS to review your return.

Being self-employed. Self-employment means you may have irregular income or that, instead of reporting income, you're reporting business losses. If your self-employment returns show any unusual patterns with income or losses, the IRS may want to check that your tax reporting is accurate.

Note:

Contrary to popular belief, claiming the home office deduction won't automatically result in an audit. In fact, the IRS has made it easier to deduct home office expenses using a simplified method.

Using round numbers. You might assume it's easier to just round up or down when reporting income or expenses but that's a no-no. The IRS might raise an eyebrow if your return is full of round numbers, since it may look like you're guessing at what your income or expenses actually were.

What Happens If Your Return Is Audited After You've Received a Refund?

What happens next if you've been audited depends on what the audit turns up (or doesn't). Tax audits can result in no corrections, or corrections with a taxpayer owing more or being entitled to a larger refund; the latter is typically rare.

If you owe taxes after an audit, it's in your best interest to pay as quickly as possible. The IRS can assess a failure-to-pay penalty if you don't and interest can also accrue. If you don't have the money to pay in full, you may want to reach out to the IRS to discuss setting up an Installment Agreement to pay any outstanding taxes owed over time.

Statute of Limitations

While the IRS tries to audit tax returns as soon as they are filed, it is not unusual to receive an audit notice about tax issues going back a few years. The statute of limitations limits the time given to the IRS to impose additional taxes, and it is typically three years after a return is due or was filed, depending on which is later. If a tax issue is not resolved within the time permitted by the statute of limitations, the IRS may ask a taxpayer to extend the statute for additional time. A taxpayer can decline such a request, forcing the IRS to make its tax determination based on available information only.

The Bottom Line

You can still be audited by the IRS, even if you've already filed and received a refund. If you are chosen for an audit, consider whether you want to get assistance from a tax professional to navigate the process. Most importantly, be prompt in responding to IRS requests for documentation or other information so the audit can be resolved as quickly as possible. If you do end up having to pay more in taxes, try to pay it off as quickly as possible to cut down on the amount of penalties and interest owed.