One of the most common questions taxpayers have is, "How far back can the IRS audit me?" It's a valid concern because an IRS audit can feel intimidating, especially if you’re unsure about your past returns. The good news is that the IRS can't go back forever—there are specific time limits in place. These are known as the IRS statute of limitations. Let's break down how these time frames work and what circumstances might extend them.
1. The General Rule: 3 Years
Under normal circumstances, the IRS has a 3-year statute of limitations from the date you filed your return to audit you. This means if you filed your return on or before the April 15 deadline, the IRS has until April 15 three years later to initiate an audit. So, for example, if you filed your 2020 return on time, the IRS can audit you until April 15, 2024.
2. The 6-Year Rule for Substantial Underreporting
If you underreport your income by more than 25%, the IRS gets more time to investigate. In this case, the statute of limitations extends to 6 years. This is common in situations where significant amounts of income are left off a tax return, whether by mistake or oversight.
For example, if you reported $100,000 in income but the IRS discovers you actually earned $140,000, the statute of limitations could extend to six years from the date you filed that return.
3. No Time Limit for Fraud or Failure to File
While most taxpayers have a limited window for IRS audits, there are two key situations where the statute of limitations doesn't apply:
Fraud: If the IRS suspects you’ve committed tax fraud, there is no time limit for an audit. Fraud involves intentional deception, such as falsifying income, claiming deductions you didn’t earn, or concealing assets.
Failure to File: If you never filed a return, the statute of limitations never starts. This means the IRS can come after you at any time, even decades later, to assess taxes owed for the unfiled years.
4. The 7-Year Rule for Bad Debt and Worthless Securities
There’s also a special statute of limitations related to bad debt deductions or worthless securities. If you claimed a deduction for these items and the IRS believes the deduction was incorrect, they have up to 7 years to audit that specific return
5. Extensions and Agreements
In some cases, the IRS may ask you to voluntarily extend the statute of limitations beyond the typical time frame. This might occur if they need more time to examine certain items on your return. If you agree to this, you and the IRS will sign Form 872, Consent to Extend the Time to Assess Tax. This extension is often used when the audit involves complex issues that require additional time for review.
6. Amended Returns
If you file an amended return, the statute of limitations generally remains the same as the original filing date. However, if your amended return shows a significant increase in income or tax liability, this could trigger further scrutiny.
What to Do if You're Being Audited
If you’re selected for an audit, it doesn’t automatically mean you’ve done something wrong. Audits can occur randomly, but having clear records can help the process go more smoothly. Here’s what you can do to prepare:
Keep Records: The IRS recommends keeping your tax records for at least 7 years, especially if you deal with more complex deductions, business expenses, or investments.
Seek Professional Help: If you're notified of an audit, consider contacting a tax professional who can guide you through the process and ensure your rights are protected.
Conclusion
For most taxpayers, the IRS statute of limitations for an audit is 3 years, but this period can extend in cases of substantial underreporting, fraud, or failure to file. Understanding these timeframes can help you manage your tax records and reduce any anxiety around IRS audits. By maintaining organized records and working with a tax professional when needed, you can ensure you're prepared should an audit come your way.
If you need assistance with tax audits or any tax-related questions, don't hesitate to reach out to Turner Business Solutions at (316) 285-0125 or schedule a consultation online.
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