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One reason some people find the idea of filing taxes stressful is because of the potential for getting audited. During a tax audit, your return is subject to further scrutiny. But there's a range of possibilities with regard to what that means.
In some cases, getting audited could mean having to provide the IRS with a few quick documents so it can verify information contained in your return. In other situations, a tax audit could be more complex and time-consuming, to the point where you need to enlist the help of an accountant to get through it.
Now, you might assume that once you receive your tax refund for a recently filed return, you're off the hook as far as an audit goes. But actually, the IRS is allowed to audit old returns, so it's important to keep recently filed returns on hand in case that happens.
Don't throw out those documents
As a general rule, the IRS has three years to audit a tax return. But in some cases, the agency gets more leeway. If the IRS identifies what it considers a "substantial error" on an older tax return, then it can dig deeper even if that three-year window has passed.
The IRS says for the most part, it doesn't go back more than six years when auditing tax returns. But that doesn't mean it can't if it notices a major problem. To be clear, a $500 underpayment generally won't trigger an audit for a five-year-old return. But a $35,000 underpayment might.
It's a good idea to keep copies of your tax returns on hand dating back at least three years. Not only that, but it's smart to retain copies of any supporting documents related to that tax return. That could include 1099 forms from your bank or brokerage account and receipts for business equipment you've claimed as a tax write-off.
In fact, it's a good idea to scan and store those documents electronically so you don't have to worry about them degrading over time. Say the IRS decides to ask for proof of a business expense from three years ago. You might have that proof -- in the form of a faded receipt that's no longer readable. And so it's a good idea to scan copies of anything related to the past three years' taxes.
What happens if you're chosen for a tax audit?
It's easy to get anxious about the idea of an audit. But rest assured that most tax audits are fairly painless and are resolved by mail. It's rare to actually have to meet with an IRS agent for an in-person audit. In fact, the IRS doesn't have the resources to send an auditor to the door of every person whose taxes need a closer examination, so unless you're talking about an extreme scenario, you should expect your audit to be conducted by mail.
In many cases, you'll even be able to rectify the issue yourself -- such as by sending the IRS the documentation it asks for. But if you need to use an accountant for help with an audit, don't stress -- that's what they're there for.
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