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.
Every year, the IRS selects numerous tax returns for audits. Tax returns can be selected 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 and comparison of a return to a similar "norm" group of returns using a statistical formula.
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. 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.
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.