The IRS does not audit often. Most of these audits are quick and painless, conducted over the telephone and by mail, with the exchange of a few clarifying documents or financial details, and a decision on your account. While millions of taxpayers are found to under-report their income, less than 1 percent of taxpayers receive an annual audit notice in the mail.
If the government has given you notice that your tax account will be audited, the first thing you need is to stay calm. The second thing you will need is patience. IRS audits are rarely over in a few months, let alone a few weeks. Certain circumstances can extend the length of an audit, including an audit reconsideration or appeal.
What Is an IRS Audit Reconsideration?
In an ideal world, the IRS sends you notice of an audit, sends you a request for specific documents (which you honor), finds that your account is not in a deficit (or perhaps has even overpaid), and makes the decision that your tax balance is $0.00 (or, that you have a refund headed your way!). But this isn’t always the case. The IRS may issue a notice of audit for various reasons, yet most of them tend to involve discrepancies in your reporting and the rest of the information the IRS gathers through reports and returns.
And because we are only human, many audits eventually figure out that the account in question made a mistake concerning a particular deduction or forgot to report a certain income. If you have no means to prove that your deduction was accurate or that you really can write that off as a business expense, you will have to pay what you owe as soon as possible. This leads to an additional tax bill you hadn’t anticipated. But if you find the documents you need to prove that the IRS’s assessment of your taxes is inaccurate, you can appeal their decision and ask for a reconsideration.
IRS Form 1040X
An audit reconsideration will lengthen the auditing process and isn’t always available to you. For example, if you’ve already paid what you owe, you cannot ask the IRS to reconsider. You can file an IRS Form 1040X to amend your tax return in light of your recent evidence and claim a tax refund. If you previously agreed to pay the amount the IRS determined you owe by signing an agreement, you typically waive your right to appeal said agreement. This makes getting a refund much harder, if not impossible.
Finally, if the decision on your audit resulted from a court judgment – because of an ongoing appeals process – that’s a final determination, and you’ve run out of options. But if you aren’t at the back end of an appeals process, disagree with the tax the IRS says you owe, and have the proof to back it up, you can hire a CPA, an attorney, or an enrolled agent and seek to appeal the IRS’s decision and ask for reconsideration in your favor.
How Long Does Audit Reconsideration Take?
The length of an IRS audit reconsideration depends on the type of audit and how quickly you can reach an agreement with the IRS. After filing your tax return, the IRS has three years to begin an audit and make a final decision on your tax account. This is the assessment statute of limitations. Completing a Form 1040 audit takes an average of 26 months (for individuals) from the filing date. The three-year limit is meant to provide the IRS with ample time to complete its assessment without cutting it too close.
From the moment you receive your first audit notice, it can take as long as two years for the process to reach its final resolution, including the reconsideration/appeals process. But not all audits take that long. A quick correspondence audit (occurring entirely via mail) can take as little as one month to complete. A field audit may be more intense. In these cases, the IRS requests that you meet them in the nearest field office or interview them at your place of work. Field audits can range from 12 weeks to 15 months to final resolution.
If you have a problem with the IRS’s decision on the audit, you can submit an appeal with the accompanying evidence and get a response within another 30 days. The average audit appeals process lasts 11 months but can be resolved in as few as four. If no other information is needed, the IRS will present a reconsideration result, which you may agree with, or appeal again through the Independent Office of Appeals (lengthening the process). You can also take them to the US Tax Court.
What Causes an IRS Audit?
Most IRS audit cases are caught by a computer, not a person. The IRS systematically filters all tax returns and goes through them for anomalies – things that might stand out, like exceptionally high or low income, strange deductions, or tax credits that a taxpayer might not qualify for. Some things are more likely to lead to an audit than others, such as a home office deduction on a profession that does not usually work from home or an unusual business expense. Any red flags are caught by the program and kicked up to a human auditor, who reviews the case and decides whether or not to audit it.
More straightforward cases, such as those involving basic math errors, might even be corrected automatically without any clarification. You get a bill in the mail with the option to appeal against the IRS’s decision to correct your math with the accompanying proof to explain it. In more complicated cases, the IRS might ask for clarifying documents or even ask you to visit an IRS office to discuss the situation. Or they might visit you at work to discuss your business or at home.
How to Prepare, Pass, and Speed Up the Audit Process
There is little you can do to force the IRS to work faster. The agency has had complications since COVID ate into its workflow, including a backlog of tax returns and delayed tax refunds. However, here are a few essential tips to help speed things along. Prepare all supporting documents ahead of time and note what the IRS tends to expect from taxpayers. There are industry-specific audit technique guides for IRS auditors that help you understand the basic game plan and a list of documents the IRS will usually request. Furthermore, working with an experienced tax professional can help speed up face-to-face audits and aid you in creating convincing appeals.