How Far Back Can The IRS Audit You: Understanding Your Tax Returns?

The IRS generally only has three years to initiate a tax audit after you file, but there are exceptions to this rule. The IRS can audit tax returns for a specific period depending on the situation. 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. In cases of fraud or if a return was never filed, the IRS can audit tax returns indefinitely, without a statute of limitations. In typical cases, the maximum amount of time the IRS can audit is three years, but this extends to six years for substantial understatements and is unlimited for fraud.

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.

• Most audits – most audits are initiated within three years of filing, but certain circumstances can extend this period. Most audits take place for returns that have been filed within the last two years.

• 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.

• Additional taxes – if the IRS finds errors during an audit, they may assess additional taxes for the years under review.

• 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, and to ensure compliance with tax laws. The IRS conducts audits either through mail correspondence, IRS office visits, or in-person field audits. IRS audits can be conducted by mail or through an in-person interview at an IRS office, your home, or your place of business. The IRS often compares your deductions and income to those of other taxpayers in similar situations to identify potential discrepancies. 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. The IRS receives copies of W-2 and 1099 forms directly from employers and income providers, which it uses to verify the accuracy of your reported income.

Audit Triggers and Risk Factors

Certain factors can increase the likelihood of an IRS audit, making it important for taxpayers to be aware of common audit triggers. The IRS uses sophisticated algorithms and data analysis to flag tax returns that deviate from typical patterns. High income is one of the most common triggers, as the IRS tends to scrutinize returns with substantial earnings more closely. Excessive deductions, especially those that are disproportionate to reported income, can also raise red flags. For example, claiming unusually large charitable contributions, business losses, or itemized deductions may prompt the IRS to take a closer look. Large charitable deductions may lead to an IRS audit due to valuation issues.

Other audit triggers include reporting significant business expenses, especially if they seem inconsistent with the type or size of the business. Self-employed taxpayers and small business owners are often subject to additional scrutiny, particularly if they claim deductions for business meals, travel, or entertainment. Self-employed individuals filing Schedule C face a higher risk of IRS audits. Filing returns with math errors, omitting income, or making frequent changes to past returns can also increase audit risk. By understanding these risk factors, taxpayers can take steps to ensure their returns are accurate and well-documented, reducing the chances of being audited.

Home Office Deduction and Audit Risk

The home office deduction is a popular tax benefit, but it is also a common reason the IRS audits taxpayers. To qualify, you must use a specific area of your home exclusively and regularly for business purposes. The IRS audits home office deductions closely because they are often misused or overstated. If you claim this deduction, be prepared to verify your eligibility with detailed records.

Taxpayers should keep documentation such as a floor plan showing the dedicated office space, photographs, and records of the square footage used for business. The IRS may request these materials to confirm that the space is not used for personal activities. Additionally, you should maintain records of expenses related to the home office, such as utility bills and repairs, to support your deduction. By keeping thorough documentation and only claiming legitimate expenses, you can reduce your risk of an IRS audit related to the home office deduction.

Business Expenses and Audit Risk

Claiming business expenses is a normal part of filing taxes, but certain types of expenses can attract IRS attention. The IRS is particularly interested in expenses that appear excessive or unrelated to your business activities. For example, large deductions for business meals, travel, or the use of a personal vehicle for business purposes may prompt the IRS to request additional documentation.

To minimize audit risk, taxpayers should keep accurate and detailed records for all business expenses. This includes saving receipts, invoices, bank statements, and maintaining logs that clearly show the business purpose of each expense. For personal vehicles used for business, a mileage log is essential to distinguish between personal and business use. By ensuring that all business expenses are legitimate and well-documented, taxpayers can better defend their deductions if the IRS conducts an audit.

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. There is a time limit for how long the IRS can initiate an audit, and this period depends on the circumstances of each case. Generally, the IRS cannot audit the same particular tax year more than once unless the taxpayer or the Secretary of the Treasury requests it.

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 identifies a substantial error on your return, such as a significant understatement of income, 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.

Additionally, tax returns with EITC claims are subject to higher audit scrutiny due to the potential for errors or fraud, and the IRS often reviews these returns more closely. Claims for the Earned Income Tax Credit (EITC) are audited at a higher rate.

Preparing for an Audit

If you are selected for an IRS audit, preparation is key to a smooth process. Start by gathering all relevant financial documents, including tax returns, income statements, receipts, and records of deductions and expenses. The IRS generally audits returns filed within the last three years, so it is important to keep your tax records for at least three years from the filing date. You are required by law to keep all records used to prepare your tax return for at least three years from the filing date.

Understanding the audit process can help reduce anxiety and ensure you respond appropriately to any information requested by the IRS. Consider consulting a tax professional who can help you organize your records, explain your rights, and represent you during the audit. A tax professional can also help you address any tax related issues that arise and ensure your documentation is complete and accurate. Being well prepared increases your chances of a favorable audit outcome and helps you avoid unnecessary penalties.

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. The IRS notifies you by mail if your account is selected for audit, and will not initiate an audit by telephone. 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 and owe additional tax, the IRS will inform you of payment options. You may be required to sign an examination report or a similar form to indicate your agreement. You will need to pay the money owed 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. If you have received a Notice of Deficiency from the IRS, check out this guide if you have more questions about IRS audits. If you do not respond by the due date shown in your audit notice, the IRS will complete the audit and send you an audit report with proposed changes to your tax return.

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.

Audit Results and Appeals

After the IRS completes an audit, you will receive an examination report detailing any proposed changes to your tax return. If you agree with the audit results, you will be asked to sign the report and pay any additional tax owed. However, if you disagree with the findings, you have the right to appeal.

The appeals process begins by requesting a conference with an IRS manager to discuss your concerns. If the issue is not resolved, you may seek mediation through the IRS’s Alternative Dispute Resolution program. As a last resort, you can file a petition with the U.S. Tax Court to challenge the audit results. Throughout the appeals process, it is highly recommended to work with a tax professional or attorney who can help you navigate the system, protect your rights, and present your case effectively. This support can be crucial in achieving a fair resolution to your tax matters.

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.