How Far Back Can IRS Audit?

How Far Back Can the IRS Audit You? 

In most cases, the IRS will include the past 3 years in an audit, but if there are substantial errors or issues found, they may go back further. Most of the time, the furthest they will go back is 6 years. Most audits will be done on tax returns filed within the last 2 years.

If you are a taxpayer or small business owner wondering how far the IRS can go back during your audit, the answer depends on your unique situation. Some common exceptions to the 3-year rule include a 6-year audit period for a substantial error (like underreporting your income) and there is no time limit if you fail to file or send in a fraudulent return, as tax evasion and fraud are criminal activities. 

If you’ve made a genuine error while filing your taxes, don’t panic. Follow the instructions provided by the IRS, give the information requested, and they will walk you through the process. 

What Is the Statute of Limitations on an IRS Audit? 

The statute of limitations is a specific, legal period that the IRS has to review, analyze, and resolve your issues, after which they cannot continue to assess, collect additional tax, or allow you to claim a tax refund. It is usually 3 years after your tax forms are due or filed, whichever is later. 

The 3-year rule begins after any extensions you’ve been granted or if you filed late. This period is known as the Assessment Statute Expiration Date (ASED).  If you don’t file your tax returns, the statute of limitations does not begin, meaning the IRS can come back and audit your return indefinitely. 

It’s possible to extend the statute of limitations, which can give you more time to provide important documentation and can give the IRS more time to process your results. If a request is made to you to extend the statute, you can refuse, which will cause the auditor to decide the outcome based on the information they currently have. 

How Many Years in a Row Can the IRS Audit You? 

The IRS can audit you multiple times, even in consecutive years. In most cases, the agent on your case will not know you have been audited the year before, but your return will still have red flags that trigger an audit. A return from a given year cannot be audited more than once, so once you’ve come to a resolution, the file for that year cannot be re-opened unless you request it or there is evidence of fraud.

The 3-Year and 6-Year Audit Rules 

Specific rules determine how many years the IRS can go back during an audit. The 3-year rule applies to most audits. This means that the statute of limitations runs for 3 years after you have filed your return or the due date, whichever is later. If you’ve filed a late return, the 3-year audit period begins after the paperwork is filed, but if you file early, the 3 years starts on the date the taxes are due. This gives the IRS more time to process each individual’s accounts, and ensure there are no tax issues to contend with. Taxpayers must also abide by the 3-year rule, filing an amended return within the same timeframe. 

The 6-year rule goes into effect in a few key cases:

• If you report 25% or less of your income on your return, the IRS can extend the time to assess additional tax changes from 3 to 6 years. This same 6-year, 25% rule may be applied if you fail to pay 25% or more in taxes in what is known as a “basis overstatement,” where items on your tax return cause you to pay less tax than you should.
• If you have omitted more than $5,000 in foreign income on your return. Hiding money in “tax havens” can result in a criminal investigation with serious financial and legal penalties.

Unlimited Statute of Limitations: When Does it Apply? 

There are a few cases where the IRS can audit your returns indefinitely. These situations include:

• An unfiled return: If you don’t do your taxes, the IRS can assess that year at any time under the Substitute for Return program. When filed, the 3-year assessment limit does not begin unless you later file the tax return.
• Agreeing to extend the time limit: If you sign a statutory waiver form, the time limit will be amended to the timeline you agree to. This is not always unlimited and you can negotiate the proposed time extension.
• Tax evasion: Wilfully filing a false or fraudulent return with the intent to avoid taxes is known as tax evasion. If you’re found to have filed a fraudulent return, the IRS will go back as far as it can to obtain all necessary information. 
• Omitting forms: Omission of certain forms, like Form 5471 if you own part of a foreign organization, form 8938 for foreign assets, or Form 5471 if you receive gifts or inheritance from foreign nationals, can cause an indefinite audit scenario.

Some other cases that may cause the suspension of the 3-year time limit on the IRS collection statute are:

• The IRS issues a 90-day Letter or a Notice of Deficiency. In the US, you have 90 days (or 150 if you live outside the US) to agree with the IRS’s proposed assessment or to file a petition with the Tax Court. The suspension begins the day after the IRS mails the letter.
• You filed for bankruptcy, in which case your assessment period will be suspended by the time allowed by law in your case.

Article Sources:

1. FRESHBOOKS. “How Far Back Can The IRS Audit?” Accessed August 25, 2024