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Does one tax audit lead to another?

In practice, one tax audit does not necessarily lead to another. Just because the IRS has conducted an audit on one year's return doesn't mean it will go back and audit your return from the year before or after that.

A new report by the Treasury Inspector General for Tax Administration (TIGTA) suggests, however, that the IRS may be doing more prior-year or subsequent-year tax audits in the future. 

According to the TIGTA report, the IRS could reach considerable amounts of uncollected tax revenue by more closely scrutinizing other years' returns filed by taxpayers who were audited.

TIGTA selected 102 audits as a sample. In all of these audits, understatement of tax liability had been at least $4,000.

The next step for TIGTA was to look at other returns from the same taxpayer, filed in other years. TIGTA found similar problems with significant understatement of tax in those years for 43 of the 102 taxpayers.

Based on this sample, TIGTA then estimated that millions of dollars in tax revenue remains uncollected every year due to understatement of tax in other years by taxpayers who have been audited.

One reason this may be happening, the TIGTA report indicated, is the widespread use by the IRS of correspondence audits. These are audits that are conducted remotely, by mail or perhaps computer, rather than meeting face-to-face.

Correspondence audits do bring in revenue. Indeed, in fiscal year 2012 the IRS sought a whopping $9 billion in additional taxes in such audits.

The question raised by the TIGTA report, however, is whether this figure should have been even more. It is therefore possible that the IRS will establish stricter guidelines for when agents who conducting correspondence audits should also review tax returns from other years.

Source: The Hill, "IRS watchdog: Agency should take second look at problematic returns," Peter Schroeder, September 5, 2013

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