Recent tax data show the IRS audited 0.38% of federal returns in 2022, down from 0.41% in 2021. Although the odds of an audit remain low, the IRS may want to take a closer look at your return for several reasons, including unreported income and excessive deductions or credits.
One question many taxpayers under IRS audit ask is whether it is okay to file this year’s taxes when there is an active audit of the previous year’s return.
Generally, you can file your current tax return even if your previous filing is currently undergoing an audit. There are no tax regulations or rules that prohibit the filing of a current return while the prior one is under audit.
However, there are certain situations when it is more beneficial to wait for the audit of the previous year’s tax return to conclude before filing current taxes.
…there are certain situations when it is more beneficial to wait for the audit of the previous year’s tax return to conclude before filing current taxes.
Can the Results of an Active IRS Audit of a Previous Year’s Tax Return Affect the Current Year’s Taxes When You File? How?
Yes, the results of an active IRS audit of a previous year’s tax return can affect your current year’s taxes when you file.
If the IRS audit uncovers errors, discrepancies, or unreported income in your previous year’s tax return, they may assess additional taxes, penalties, and interest for the underreported or unreported income.
You would generally be required to pay the amount owed due to the audit. Some of the specific scenarios include:
Claiming someone as a dependent on your tax return can lead to complications if the IRS determines that the individual in question does not meet the criteria for being your dependent.
This can result in the need to repay tax credits you received, such as Child Tax or Earned Income credits.
Carryover of Losses and Credits
If the IRS audit results in changes to your previous year’s tax return, this can affect any carryover items, such as capital losses, net operating losses, and tax credits.
Not having these carryovers can increase your current year’s tax liability, as the adjustments may prevent you from using losses and credits to offset income for the current tax year.
When you have claimed certain expenses, the IRS can reject them during an audit. It means that expenses you thought were deductible and had planned to deduct again in the current year might not be accepted by the IRS.
Depreciation of Rental Assets
Not claiming depreciation deductions on rental property can come back to haunt you. Even if you did not claim initially, the IRS might require you to if you sell the property, potentially leading to unexpected tax liabilities.
Will Filing This Year’s Taxes While Your Last Return is Under Audit Impact the Audit Findings?
Generally, filing this year’s taxes while your last return is being audited cannot impact the audit findings related to the previous year’s return. The previous year’s audit is an entirely separate process that runs independently from your current year’s filing.
However, as mentioned earlier, if the audit results in changes to your prior year’s tax liability, like owing additional taxes or receiving a refund, it can have financial implications. Make sure you are prepared for any potential liability outcomes of an audit.
Should You File an Amended Return for an Audited Return Before Filing New Taxes?
As the name suggests, an amended return is a form that a taxpayer files to make corrections to a tax return from the previous year.
In many cases, the IRS will provide you with a notice that outlines the changes they made to your audited return and the amount you owe or the refund you will receive based on their audit findings.
If you agree with the changes on your audited return, you generally do not need to file an amended return for the same tax year. Instead, follow the instructions in your audit notice for payments or refunds.
Can You e-file Current Year IRS Taxes If You’re Under Audit for a Previous Year?
Yes. You can e-file your current year’s IRS taxes even if you are under audit for a previous year.
Are You Still Eligible for a Refund for This Year’s Taxes While the IRS Audits Last Year’s?
If you can demonstrate to the IRS that you accurately took the deductions or tax credits, the agency will proceed to release your refund or make any necessary corrections.
However, if the IRS is conducting an audit of your previous tax returns and thinks you owe additional taxes as a result, they can freeze your refund.
Can You Request an Extension to File Taxes Before the IRS Completes its Audit of Previous Taxes?
Traditionally, federal tax returns are due in April. However, you can request an extension to file your taxes with the IRS even if the IRS is currently auditing your previous tax returns.
Remember, even after getting an extension to file, you will still need to pay total taxes owed in full by the tax deadline.
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