The IRS generally only has three years to initiate a tax audit after you file, but there are exceptions to this rule. If you significantly understate your income, the IRS can go back six years. The agency can go back an unlimited amount of time for civil fraud or unfiled returns.
Wondering if your tax returns are subject to an audit? Concerned that a recent audit request involves a return that’s past the audit statute of limitations? Need representation for an upcoming audit? Then, contact us at Damien’s Law today.
Key takeaways
- Tax audit – a thorough examination of your tax returns and supporting documents to ensure compliance with the tax code.
- Statute of limitations – the IRS has three years from the later of the date you filed the return or the original due date to audit a return.
- Extended audit timeline – if the IRS discovers that you significantly understated your income, the agency may look at the last six years of returns.
- Civil fraud – for civil tax fraud, the IRS can go back an unlimited amount of time.
- Audit representation – work with an experienced audit attorney to protect your interests and help you deal with audit inquiries, appeals, penalties, and other problems.
What is an IRS tax audit?
An IRS tax audit is an examination of an individual’s or business’s financial records to verify that their tax return information is complete and accurate. The IRS conducts audits either through mail correspondence, IRS office visits, or in-person field audits. Correspondence audits require you to mail information to the IRS, while office or field audits require you to meet in person to provide documents and back up the claims made on your tax return.
Timeframe for an audit
The IRS has a limited window in which it can open an audit, and that window varies depending on the type of audit and the taxpayer’s compliance with the tax code.
Audit statute of limitations
The statute of limitations is the timeframe in which the IRS can audit a tax return. The timeframe is as follows:
- Three years – In most cases, the IRS must audit the return within three years of the due date or three years of the date it was filed if later. For instance, if you filed your 2024 tax return early, the IRS has three years from the due date (April 15th, 2025) to audit that return – that means the IRS has until April 15th, 2028, to audit your 2024 tax return.
- Six years – If the IRS sees substantial errors, the agency can go back six years. That means they have until April 15th, 2031, to audit a 2024 tax return. Typically, the agency starts with three years, and if there are problems, they expand the scope to the last six years of returns.
- Unlimited – In cases of civil tax fraud, the IRS can go back an unlimited amount of time to audit old returns and bring forward civil fraud penalties. However, for criminal fraud, the statute of limitations is six years from the last affirmative act.
Significant tax understatements can be caused by not reporting all of your income, overstating business or personal deductions, or claiming credits or deductions that you’re not entitled to.
Why does the IRS only have three years to audit a return?
The IRS only has three years to audit a return because the assessment statute expiration date is just three years. In other words, the IRS only has three years to assess new taxes, so they must audit your return within that window.
Can the IRS audit unfiled returns?
The IRS can only audit returns that have been filed. It’s impossible to audit an unfiled return. However, if you don’t file, the clock on the statute of limitations never starts. That means that, effectively, the IRS can select any year that you have unfiled returns, no matter how far back, and assess tax against you.
How long can the IRS audit payroll returns?
The timeline to audit payroll returns is also three years, but it doesn’t start on the due date of each quarterly return. Instead, it starts on April 15th of the year following the year the payments were made. For instance, the due dates for 2024 payroll returns are April 15th, 2024, July 15th, 2024, October 15th, 2024, and January 15th, 2025. But the audit clock doesn’t start until April 15th, 2025, and the IRS may audit these returns until April 15th, 2028.
However, the IRS sometimes extends the deadline. In particular, the deadline to audit returns with employee retention credits was extended to five years in some cases.
The six-year audit rule
The IRS has strict rules on when it can go back six years in an audit. There are specific types of errors that can extend the audit statute to six years:
- Significant income understatement – Usually applies if you left off more than 25% of your income. For instance, you reported $70,000 of wages but didn’t report $25,000 of net self-employment income. Or you reported $150,000 of wages but didn’t report a $50,000 bonus.
- Basis overstatements – If a basis overstatement leads to a 25% or higher understatement of income, the six-year rule applies. For instance, you say that the basis of an asset is $1 million, but it was only $500,000. So you have effectively underreported your income by $500,000 – if that’s more than 25% of your income, it opens you to a longer audit window.
- Foreign income, gifts, or assets – If you fail to report more than $5000 in foreign income, the IRS can go back six years. That’s even true if the income was interest and you filed the FBAR to report the account, but then failed to report the interest from the account.
What to expect if you’re selected for an audit
The IRS will notify you by mail if you’ve been selected for an audit. The notice will outline the type of audit, the return being audited, the documents you need to provide, and the deadlines for doing so. If you comply with the request, you will provide the auditor with documents. Then, they will review the documents and ask for more details as necessary.
Finally, based on the details provided, the auditor will decide whether or not to make changes to your tax return. If they do and you disagree, you have the right to appeal. If you agree with the changes, you should pay in full or explore payment plans, offer in compromise, or other relief options.
What if you ignore the audit request?
If you ignore the audit notice, the IRS will essentially do the audit without your input. That typically leads to an unwanted tax assessment plus audit penalties. Check out this guide if you have more questions about IRS audits.
What if the audit assessment deadline has passed?
If the IRS contacts you after the audit assessment deadline, you should reach out to an attorney. The IRS may be contacting you in error, or they may have calculated the ASED incorrectly. Or the auditor may be going back a long time because they already suspect fraud or significant understatement, and in that case, you definitely need legal representation.
What if the IRS asks you to extend the ASED?
In some cases, the IRS may ask you to extend the ASED – assessment statute expiration date. This means that the IRS has longer to conduct the audit and thus more time to assess taxes against you.
Before signing a document like this, consult with an attorney. On one hand, you don’t necessarily want to give the auditor extra time, but on the other hand, you don’t want them to rush the audit and force you into appeals. A tax attorney can help you weigh the options.
Does amending your return increase the audit timeline?
Generally, no. However, if you audit a return within 60 days of the ASED, the IRS gets an additional 60 days to assess tax on that return – typically, this only applies if the new return shows a higher tax liability.
How long does the IRS have to collect back taxes?
A tax audit often leads to a tax assessment, and the IRS also has limits on how long it can collect delinquent taxes – this limit applies to income taxes as well as delinquent payroll taxes.
The statute of limitations on collections is the timeframe in which the IRS can attempt to collect taxes that are owed. The statute of limitations is 10 years, but it can be shortened or extended depending on the circumstances.
For example, if a taxpayer files for bankruptcy, the statute of limitations is suspended until the bankruptcy is discharged. Additionally, if a taxpayer leaves the country, the statute of limitations is extended until the taxpayer returns to the United States.
Do past audits increase the risk of future audits?
If you’ve been audited in the past, that could also increase the chances of being audited again. The IRS has a program called the Audit Recurrence Program, which targets taxpayers who have been audited in the past.
Understanding the audit recurrence program
The Audit Recurrence Program uses a scoring system to select taxpayers for audit. The scoring system takes into account factors like how many times you’ve been audited, how much tax you owe, and whether you file your taxes on time. So, if you’ve been audited in the past, that could increase the chances of being audited again.
However, it’s important to note that just because you’re in the Audit Recurrence Program doesn’t mean you will definitely be audited.
Get help with IRS tax audits now.
When examining how far back can the IRS audit, it is important to remember it is based on specific circumstances. Get started today by contacting us online or by calling (601) 202-4745.
