Yes, even if you are on an installment plan with the IRS, they would still withhold any refund you have coming for the 2008 tax year. The amount they withhold would, of course, be applied to your outstanding balance, so you will end up paying off your tax debt sooner than defined by the plan.
Once you are on an installment plan and you remain current with your payments, the IRS will not inititate liens
or levies on your wages or bank accounts or properties, but they would continue to hold any federal refund you have coming in future years until the debt was paid.
As far as how long it takes the IRS to notify taxpayers of a problem with their tax return, every situation is different. The IRS generally has 3 years from the original due date
of a return to audit and access additional taxes. That time frame is extended to six years in cases where an individual has under-reported their income by more than 25%. We have had many taxpayers come through this forum who are just now receiving notices of their tax delinquency going back to 2005 and 2006, so even though it may not be much consolation to you, in your case your audit actually came fairly quickly in comparison to what it might have been.
Audits are initiated based on a number of factors, such as the total income and expenses you are reporting for the current year in comparison to previous years; the deductions
you are claiming in comparison to national averages; mathematical errors on your return. There is also a small percentage of returns which are selected at random for routine audits. So it just depends on the circumstances surrounding each case as to how long it may take for the IRS to notify you of additional taxes due.
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