How often
can the IRS audit you for the same thing?
I would have
to ask two more questions before answering:
(1) Is the IRS auditing the same year?
(2) Is the IRS auditing the same issue?
Here is the relevant
Code section:
IRC Section 7605(b):
No taxpayer
shall be subjected to unnecessary examination or investigations, and only one
inspection of a taxpayer's books of account shall be made for each taxable year
unless the taxpayer requests otherwise or unless the Secretary, after
investigation, notifies the taxpayer in writing that an additional inspection
is necessary.
Focus in on
the lawyered wording:
“unnecessary examination or investigations”
“an additional inspection is necessary”
If I were
the IRS, I would argue that all examinations and inspections are “necessary”
and be done with the matter.
Fortunately,
it does not work that way.
Let say that
you are self-employed and deducted a bad debt – a sizeable one – in 2014. The
IRS takes a look at it and raises some questions, as bad debts are a notorious
area of contention with the IRS. After some back and forth the IRS agrees to
the deduction.
Question: Can the IRS audit your 2014 tax return again?
Answer: Of course it can, at least until the statute of limitations expires. What it cannot do is audit your 2014 bad debt again. It already looked at that issue and did not propose an audit adjustment. There is only one bite at the apple.
This does
not mean that you are untouchable, however.
Let’s say
that you incur a huge net operating loss in 2016. You decide, after meeting
with your tax advisor, to carryback the loss to 2014 and get a tax refund. You
could really use the cash, with that loss and all.
Question: Can the IRS audit your 2014 bad debt again?
The answer
may surprise you: Yes.
Here is the
Court:
This is not a case where the IRS is subjecting the Taxpayer to onerous and unnecessarily frequent examinations and investigations. The reexamination of Year 1 is not a unilateral action on the part of the IRS, but in response to the Taxpayer’s election to carry back net operating losses and claim a refund.”
In other
words, you started it.
Let me give
you a second scenario:
You have a large donation in 2014 and
another large donation in 2015. You were audited for 2014. The IRS made no
change to your return.
Question: Can the IRS audit your 2015 for the donation?
Here is
Internal Revenue Manual 4.10.2.13:
(1) Repetitive audit procedures apply to individual tax
returns without a Schedule C or Schedule F, when the following
criteria are met:
·
a. An examination of
one or both of the two preceding tax years resulted in a no change or a small
tax change (deficiency or overassessment), and
·
b. The issues examined
in either of the two preceding tax years are the same as the issues selected
for examination in the current year.
Answer: You should be able to stop this audit. The IRS looked at the same issue in the preceding year and found nothing.
BTW, note the references to Schedule “C”
and “F” in para 1 above. Schedule C means that someone is self-employed, and
Schedule F means that someone is a farmer. Those are two situations where a tax
advisor would love to have this IRM protection. The IRS knows that too, which
is why the IRS left out self-employeds and farmers.
Question: What if the IRS audits you in 2014 for mileage and in 2015 for office-in-home expenses?
Answer: You being are audited for two different things. What we are talking about is the IRS looking at the same thing, either more than once for the same year or more than once over a three-year period.
Let’s clarify a crucial point: what halts
the second audit is NOT that you were previously audited on the same issue.
What halts it is that you were audited and there was no change or an
insignificant change. If you owed big bucks on the audit then you are fair
game.
A word of advice: you will have to let
the examiner know. My experience is that he/she will be unaware until you bring
it up. Address this issue early – for example, when the examiner is trying to
schedule the visit – and you can stop the audit altogether.
