There are limits on the IRS continuing audits year after year. These audits are known as “repetitive audits.” Their scope is limited by Internal Revenue Manual 126.96.36.199.5.
The Internal Revenue Manual states that if you are contacted by the IRS, and had a similar issue examined by them in either of the two prior years, and there was no change or a small change in the tax from the audit, the new examination will be discontinued. If a substantive tax change resulted from the prior audit, the IRM provides that the repetitive audit procedures do not apply and the examination will go on.
The issue in a potential repetitive audit is whether the prior case had a small change (discontinue) or a substantive change (continue).
What if the IRS accepts 97% of taxpayer verifications in a one year audit, resulting in a $5,000 tax deficiency, but seeks to audit the next year’s return after completing the audit? This is a real life case currently pending with one of my clients before the IRS, involving a successful real estate agent who was able to verify 97% of auto mileage, subcontractor labor and match income on the return to that on his bank statements. But the IRS wanted to audit a second year.
Isn’t a 97% verification rate saying the taxpayer is abiding by the laws? Or is a $5,000 deficiency substantial enough to continue on? IRS Policy Statement 4-21 provides that auditors are to make efficient use of examination staffing and resources and promote the highest degree of voluntary compliance. How does this situation fit within that directive? Is further pursuit of a 97% verification rate promoting more voluntary compliance?
There are no limitations by law as to repeat audits. The limitations are administrative and discretionary within the IRS from the Internal Revenue Manual. That being said, if you are being audited and the IRS has found minimal changes, but wants to go into other years, be sure to assert your rights against repetitive audits.