So you’ve received an audit letter from the dreaded IRS. Whether you were expecting it or not, the first question that pops into your upset/annoyed/fearful (insert appropriate adjective here) mind is “How long is the IRS audit process timeline?“
That’s difficult to answer because there is no one answer to tax audit procedure and there are different types of tax audit so it largely depends upon the taxpayer’s circumstances. If it’s your business that is being audited, it can hinge on size and number of revenue streams.
The government takes IRS audits seriously. It helps them to catch tax cheats and is a major source of revenue. But this shouldn’t scare you. In fact, should you receive a notice to audit from the Internal Revenue Service, responding in a manner less than professional will only make it harder for all concerned.
How long does an IRS audit take to complete?
Now for the answer to the all too familiar question every tax attorney gets: “How long does a tax audit take?” The IRS audit period itself should generally take no more than five to six months. Sometimes with proper preparation, they can be resolved faster.
However, there are four common factors that can hold up an audit, including:
- The IRS finds a lot of things to change (adjustments) on your return.
- You own a small business.
- The IRS pursues penalties.
- You disagree with the auditor’s adjustments.
According to the Internal Revenue Manual which agents are supposed to follow, the IRS audit timeline is 26 months after the due date of the tax return or the date it was filed, whichever is later.
Keep in mind, however, that IRS audit periods that take longer than a few months are a red flag. It means the auditor is on a fishing expedition of sorts. The problem is that most taxpayers that get audited have an adjustment the IRS is seeking to make, so it is important to understand where the pain point is, address it and move on.
How does an IRS audit work? Basic IRS auditing procedures
How do IRS audits work? Since there is more than one type of tax audit, it follows that there is more than one tax audit procedure. To begin with, there is a filtering process that all tax returns go through in order to determine which ones get flagged for possible audits.
Here is the framework for how IRS tax audit procedures work:
- All tax returns are processed into a computer, where they are assigned two scores: a DIF score (assessing the potential changes on a tax return [i.e. increased revenue]) and a UDIF score (assessing the potential that there is unreported income on a tax return).
- Returns with high scores are sent to an IRS reviewer, who manually examines a return to determine its potential for audit.
- Those that are selected by the reviewer are sent to local field offices where a revenue agent will conduct an IRS audit.
- Those not selected by the reviewer are tossed back into the pile (so to speak), and are safe from audit.There are a limited number of IRS audits that are conducted every year. Because of this, the IRS selects the tax returns that are most likely to yield revenue or that contain the greatest potential for error for additional review.
Think of it from the government’s perspective: why would they devote manpower, time, and limited resources toward auditing a return that is likely not going to yield them additional revenue?
Answer – they probably won’t. Not surprisingly, the government uses statistics to analyze tax returns and to determine which taxpayers it selects for IRS audits. Unlike a straight W2 employee, small business tax returns are much more complicated and leave a lot of room for error.
This error often translates into tax loss for the IRS and, therefore, makes small business owner tax returns a frequent target of IRS audits. Statistically, they are just more likely to get popped.
No one can be 100 percent certain of what their audit risk is or can fully audit proof their tax return, but prudence is the best way to safeguard yourself. Keep honest, accurate and orderly records. This way, if IRS does come knocking, you can rest easy knowing that you should have nothing to worry about.
What happens if you get audited and don't have receipts? IRS agents also accept canceled checks, written records, bank account statements, debit and credit card statements, or other documentation as proofs for verification. It's also a good idea to look for IRS audit representation. They can help you decide what to claim as a business expense without receipts.
Example of an IRS audit process timeline 2023
By now, you should have an understanding that an IRS audit timeline can vary. To further define why, I’ll boil it down to explaining the three types of audits, which in most cases, will also determine the length of the audit.
During each tax year, audits are conducted by correspondence, telephone, or through field interviews. Business returns are typically examined in an office or field interview rather than by correspondence because of the complexity of the issues involved in a business audit.
Tax returns selected by the IRS for an audit have some burning questions that the manual reviewer has flagged. Once the notice of an IRS audit is sent out, the procedure itself should take place within one year from the date in which the return was filed, but it can take as long as three years when the statute of limitations expires.
The three types of audits also vary in degree of severity. The type of IRS audit tends to reveal much about its purpose and the overall strategy of the Internal Revenue Service.
The Correspondence Audit
Simply put, this type of audit occurs when the IRS finds a small error on your return and asks you to explain it through the mail. Known internally by the IRS as a Campus Examination, the correspondence audit is considered the most basic type of audit. They involve less technical tax issues and can be completed, like their name implies, through the mail.
As the IRS notes, the purpose of a correspondence audit is to resolve tax problems quickly and easily through correspondence and/or by telephone.
Examiners at the correspondence and office levels are much less invasive. The examining agent is required to process many cases without much familiarity with the return itself.
In fact, it is often the case that the examiner has not reviewed the taxpayer’s file or the return until after the taxpayer has replied to the agent’s correspondence. The agent generally reviews the taxpayer’s file on the day of the interview.
The Office Audit
Office audits, or Area Office (AO) Examinations, are face-to-face audits that are conducted at the office of an IRS revenue agent. They are typically appropriate for somewhat complicated issues, which may include small business returns and complex non-business returns.
Office audits may also be conducted by either correspondence and/or office interview.
In general, examination of a taxpayer’s income tax return falls initially under the responsibility of an area office where the taxpayer resides, conducts business, or maintains a principal office. The responsibility for the examination is assigned to “an examiner at the post-of-duty nearest to the taxpayer’s residence or place of business.”
If it becomes necessary to transfer a return to an office within another area after the examination process has begun, the convenience of the taxpayer will be taken into consideration as long as the transfer process aligns with “sound and efficient tax administration.”
However, what typically controls the decision-making with regard to the transfer of a case between area offices is the location of the taxpayer’s records, the purpose of principal investigative work, and where the taxpayer’s issues can be resolved most efficiently. These factors will overrule the taxpayer’s request for a case transferal.
With this in mind, a taxpayer’s case may be transferred (back) to the Area Office or between area offices. When the case is transferred, it receives audit reconsideration.
According to the IRS, “The examiner in the CRU (Central Reconsideration Unit) will send a case to the area examination function to be worked if the taxpayer requests a face-to-face examination, and/or [if] the completion of the case requires an examination of books and records, and/or [if] the CRU has not received the training to work the reconsideration issue(s).”
Regarding face-to-face examinations, the Central Reconsideration Unit (CRU) receives those tax returns that were previously examined by the Area Office or Campus Examination function.
In this respect, the purpose of the audit reconsideration process is to examine those tax issues previously overlooked. For example, according to the IRS, if “the taxpayer presents new information that was not previously considered, [IRS employees] evaluate that information and determine if a change to the assessment is warranted.” The Area Office function will then make that change.
After the AO examiner receives and evaluates the taxpayer’s information, the examiner will issue a decision based upon the type of case.
For example, the AO examiner may “issue the audit reconsideration full allowance (full abatement of assessment)” by completing and submitting Letter 2738 DO, which is a service letter the IRS uses when the taxpayer’s case is eligible for full abatement.
The examiner may issue an audit reconsideration full disallowance letter, which means the taxpayer would not receive an abatement of tax.
Lastly, the examiner may issue another letter, an audit reconsideration partial disallowance letter (Letter 2737 DO, Examination Report). With this letter, the examiner must send to the taxpayers two publications: Publication 3598, What You Should Know About the Audit Reconsideration Process and Publication 5, Your Appeal Rights and How to Prepare a Protest If You Don’t Agree. Taxpayers may request an appeal for full disallowance and partial disallowance determinations.
Area Office examiners have little discretion and are typically required to verify income and deductions. “A taxpayer’s inability to produce adequate records may lead not only to disallowance of the disputed items for the year at issue, but also to audits of other years’ returns.” It is important for taxpayers to maintain good records.
The Field Audit
That is the scenario that most people associate with an audit — when somebody from the IRS shows up at the door of your home or office.
Field examinations, or field audits, are used for the most complex issues. The method of the audit is governed by the difficulty of the issues. Field audits are defined as in-person audits conducted at the organization’s location, the organization’s representative office, and/or at the local IRS office.
There are two types of field audits:
- General Program – a type of field exam conducted by a revenue agent at the organization’s location.
- Team Examination Program – defined as a type of exam involving a team of examiners; it is more specific to large, complex organizations.
The examining agent will function as a revenue agent — within this context not all revenue agents are considered accountants — who may be an accountant who works for the Internal Revenue Service. Unlike other types of examinations, revenue agents spend considerable time reviewing the taxpayer’s return.
The revenue agent examines and audits financial records of individuals, businesses, and corporations to ensure tax liabilities are met. The revenue agent reviews the taxpayer’s books and records at the place of business or warehousing location. In addition, the revenue agent reviews the taxpayer’s return and related supporting documentation.
The agent may be assisted by an engineer agent, who supports the mission of the IRS by providing “professional and accurate development of issues and efficient and effective resolutions to more significant and complex engineering and valuation issues.
"Engineers provide expertise to issues encountered in all types of tax returns”. The engineer agent plays a key role in supporting all IRS organizations that provide for the examination of taxpayer returns.