The IRS audited my husband’s 2021 tax return and, yes, he made some mistakes. Now it wants two years to look at his 2022 tax return. Is this normal?

‘Must we agree to have this hanging over our heads that long?’

Dear Tax Guy,

My husband owns his own business. The Internal Revenue Service audited his 2021 income-tax return. There were some small mistakes. The amount due was paid. However, he received notice at the end of 2023 that he was also being audited for 2022. When the auditor came to the office, he said it was because the company had a big increase in revenue.

We were told the audit would be completed by May 2024. He recently received a notice saying the IRS wants two more years to complete the audit. Is this normal? Must we agree to have this hanging over our heads that long? We provided all the required documentation, so I’m not expecting problems. I just don’t like it taking so long.

Anxious About the Audit

Dear Anxious,

The IRS wants more time to determine the bill, so how much slack do you give the tax collector?

If you agree to the extension, would it be enough time to tie your husband into new knots and extra tax obligations? Or, if you are not expecting any new problems, does the extension give the auditors more time to eventually see what you see? And if you refuse, does it force the IRS revenue agent to rush a decision you may have to dispute?

I can’t tell you how to respond to this request. Neither can tax professionals without knowing more about the audit — and your stomach for the potential consequences.

“That’s not a ‘yes’ or ‘no’ answer that someone should give off the cuff,” said attorney Michael Villa, a partner at Meadows, Collier, Reed, Cousins, Crouch & Ungerman.

Now is the time to find an accountant or tax lawyer, if you don’t have one already.

But as you consider your move, I can offer context. This is an important time to talk about what to expect as the IRS dials up high-level enforcement.

Let’s start with the 2022 tax return that’s come under scrutiny after the mistakes on the 2021 return. Even if everything is fine with this return, there is a reason why the IRS wants to look at it.

Tax returns are picked for audits either through random selection based on statistical models or as a related examination, said Eric Hylton, a former high-ranking IRS official who once led the agency’s Small Business/Self Employed Division.

As a related audit, the IRS may be looking into tax returns from other years “if there’s a reasonable belief those additional years need to be corrected as well,” said Hylton, national director of compliance at alliant, a tax advisory and consulting firm.

The IRS is tight-lipped on all the red-flags that its audit algorithms will snag, said Villa. But in his experience representing taxpayers under audit, he’s not surprised to hear you mention the auditor’s notice of the year-over-year revenue increase.

That’s because he’s found that big year-over-year swings in major money categories like reported revenue, deductions and expenses can give the taxman pause, he said. “That is something that can raise eyebrows,” according to Villa.

 So it’s not surprising the IRS wants to look at the 2022 return. Since passage of the 2022 Inflation Reduction Act, the IRS has been increasing its tax compliance focus on businesses and rich taxpayers. The focus translates into more willingness to dig beyond the initial scope of an audit.

Timelines and tactics

Once a return is filed, the IRS generally has three years to decide whether to assess more tax, Villa said. Of course, there are exceptions and situations that can lengthen the IRS look-back window, he noted.

It’s been taking auditors less time to complete many audits in recent years, statistics show.

Consider the huge band of tax returns with total positive income between $50,000 and $10 million. Numbers from an IRS watchdog say it took auditors 295 days to wrap up their examinations in fiscal year 2023. That’s down from a 385-day average in fiscal year 2021, according to the IRS National Taxpayer Advocate.

Taxpayers agreed to IRS adjustments roughly 40% of the time. In 13% of these cases, the scrutiny ended in no change to the tax bill. The majority of these are “correspondence audits,” meaning they are carried out with phone calls and letters instead of “field audits” that include in-person interactions.

The three-year timeline is not ironclad and the IRS can ask the taxpayer for more time.

But things are not always what they seem. While the IRS often asks taxpayers for an extension, its reasons can vary, said Rochelle Hodes, a principal at the accounting and advisory firm Crowe LLP.

Some requests “are fairly innocuous,” like a revenue agent asking for more time because the person now has training assignments to juggle, Hodes said.

Other extension requests could be loaded. Auditors could be asking for more time because they are waiting on a specialist to dig into a different part of the return, she said.

“A professional representative will know how to interact with the agent and evaluate the situation,” Hodes said.

There was still plenty of time on the clock with the 2022 return, so the request could be “premature,” Villa said. But it’s difficult to say for sure without knowing more about the specifics, he added.