People who make more money are more likely to be audited, there’s an exception to that rule: People who claim the Earned Income Tax Credit.
This tax credit is targeted toward low-income Americans. And in terms of numbers, the IRS processes far more audits of these taxpayers than it does for any other group of people. Of the roughly 681,000 returns that were examined in fiscal year 2019, more than 301,000 were for individual returns where this tax credit was claimed, according to IRS data.
These audits are highly automated affairs, but that doesn’t mean they go by all that quickly. Experts say that the typical audit takes anywhere from three to nine months to be resolved.
On its website, the IRS notes that a statute of limitations generally limits the amount of time to assess additional tax on a return to three years from when that return was due or filed. However the agency can request an extension if an audit is not resolved.
(The IRS did not immediately provide comment when asked for data regarding the average duration of audits.)
“People have this conception of an audit that the IRS is going to knock on your door and talk to you,” said Michelle Drumbl, a professor and director at Washington & Lee University School of Law’s Tax Clinic. “The majority of audits would be done by mail.”
Mail-based audits are also known as correspondence audits. In many cases these audits are triggered when the IRS’ system flags a return for some issue, whether it’s a question about a taxpayer’s qualifying for the EITC or something as simple as a math error. The agency then sends the taxpayer a letter informing them that they’re being audited.
The language of these letters can leave taxpayers confused, experts told MarketWatch, which can draw out the process if they don’t respond expediently. It’s “very common” for taxpayers to not even understand that they’re under audit, Drumbl said. “The notices are very boiler-plate, catch-all.”
Typically, the letter will request documentation to clarify the perceived error or justify the claiming of a tax credit. Taxpayers then send those materials to a specific IRS campus to be processed to determine if enough documentation was provided.
While a taxpayer can respond on their own, IRS agents have little leeway in what they can accept. And taxpayers are not always aware of the required documentation, especially when it comes to providing proof that you have children in your household for the EITC.
Low-income taxpayers may have access to pro bono attorneys who can help them with their audit. Even then though, there are limits to what a lawyer can do to speed up the process in most situations beyond helping their client come up with the right paperwork.
“I have no ability as a lawyer to cut through the red tape,” Drumbl said. Taxpayers can call the IRS for clarification, but when they do they can expect long waits on hold. For these audits, though, the IRS doesn’t assign an examiner to a specific audit, so multiple agency employees will handle a case. That can make getting clear answers over the phone more difficult.
Tax experts interviewed by MarketWatch noted that when high-net-worth individuals like President Trump face an audit, their legal or financial counsel can take steps to an extend an audit to ensure a more beneficial outcome.
“If you’re represented by counsel, you just turn this over to your accountant or lawyer and they handle it,” Lipman said. “Donald Trump isn’t interacting directly with the IRS at all.”
When audits are performed on sizable returns or in scenarios where a taxpayer owns multiple businesses, an office or field examination may occur where the taxpayer or their representative meets in person with an IRS agent to go over materials.
“That elevates it to a much more sophisticated level,” Lipman said. “You’re working one-on-one with someone, which very much humanizes it. It beats people answering the phone.”