By Kelly Hanley, Esq., Tax Attorney
Delve into the depths of IRS audit timelines, discover how long they can look back, and learn what you can do to stay prepared.
Introduction
If you’ve ever wondered, “how far back can the IRS audit?” you’re not alone. As a taxpayer, you should understand the potential risks and consequences of an IRS audit. Knowing the limits of audit periods, known as statutes of limitation, will help you better prepare your financial records and potentially save you from fines, penalties, and anxiety.
In this blog post, we will explore the various factors affecting how far back the IRS can audit, including the standard audit period, exceptions to the rule, and circumstances that may extend the audit period. Finally, we’ll provide you with practical tips on how to maintain your financial records and protect yourself from unwanted surprises.
To ensure you’re prepared for any potential IRS audit, contact The Tax Defenders at (312) 345-5440 for a free attorney consultation.
How Far Back Can the IRS Audit? Understanding the Standard Audit Period
The standard audit period for the IRS is generally three years. This means that the IRS can audit your tax returns filed within the last three years. However, the IRS audit clock starts ticking from the date you file your return or the return’s due date, whichever is later. For example, if you filed your tax return for the 2021 tax year on April 15, 2022, the IRS has until April 15, 2025, to initiate an audit.
Exceptions to the Rule: What Can Extend the IRS Audit Period?
There are several circumstances where the IRS can extend the standard three-year audit period:
Substantial Understatement of Income (Six-Year Audit Period)
If you have understated your income by more than 25% on your tax return, the IRS can audit your return for up to six years. This six-year audit period aims to provide the IRS with adequate time to uncover significant discrepancies and ensure taxpayers accurately report their income.
Fraudulent Tax Returns (No Time Limit)
In cases of suspected tax fraud, the IRS has no time limit to initiate an audit. Tax fraud typically involves the deliberate act of providing false information on a tax return to avoid paying taxes. While the terms fraud and evasion may often be used synonymously, they do not hold identical meanings. Evasion constitutes a criminal act, whereas fraud can be classified as either a civil or criminal offense. The statute with “no time limit” pertains specifically to civil tax fraud, rather than criminal tax evasion.
Special Cases: Circumstances That Can Further Extend the Audit Period
In some instances, the IRS audit period can be extended even beyond the six-year limit:
Failure to File a Return (No Time Limit)
If you fail to file a tax return for any given year, the IRS has no time limit to initiate an audit. The clock never starts ticking on an unfiled return, leaving you vulnerable to an audit at any time.
Extension Agreements (Varies)
Sometimes, taxpayers may voluntarily agree to extend the statute of limitations on the audit period by signing an agreement with the IRS. This typically occurs when the taxpayer and the IRS are negotiating a resolution to a tax issue, and more time is needed to reach a settlement.
How to Protect Yourself: Best Practices for Maintaining Financial Records
To prepare for a potential IRS audit and protect yourself from penalties and fines, follow these best practices for maintaining your financial records:
Keep Accurate Records
Ensure all your financial records, including income statements, expense receipts, and bank statements, are accurate and up-to-date. Proper record-keeping will help you avoid unintentional discrepancies and make it easier to defend yourself in case of an audit.
Retain Records for the Appropriate Time Period
Keep your tax records for at least three years from the date you filed your return or the return’s due date, whichever is later. However, considering the exceptions and special cases that can extend the audit period, it is advisable to keep your records for at least six years.
Organize Your Records
Organize your financial records in a systematic manner, making it easier for you to access and review them when needed. Proper organization can save you time and effort during an audit and reduce the likelihood of errors or omissions.
Seek Professional Help
Consider seeking professional assistance from tax attorneys, certified public accountants (CPAs), or enrolled agents to ensure your tax returns are prepared accurately and in compliance with tax laws. These professionals can also provide valuable guidance and representation during an IRS audit.
Frequently Asked Questions About IRS Audits
What triggers an IRS audit?
Common triggers for an IRS audit include discrepancies between your tax return and third-party information (e.g., W-2s and 1099s), significant fluctuations in income or deductions, high-income earners, and self-employed individuals with complex tax situations. That being said, the IRS Restructuring and Reform Act of 1998 prohibits the IRS from formally establishing “red flags” that automatically trigger an audit.
What are the odds of being audited by the IRS?
The odds of being audited by the IRS are relatively low for most taxpayers if you equate the chance of being audited with the overall IRS audit rate. In recent years, the overall audit rate has been around 0.5%. However, this rate may vary depending on your income level and other factors. Also, some legal scholars argue that the odds of being audited and the audit rate are not the same.
What happens if I am audited by the IRS and they find errors in my tax return?
If the IRS finds errors in your tax return during an audit, you may be subject to additions to taxes, penalties, and interest. In cases involving fraud or tax evasion, you may also face criminal charges.
Stay Prepared with The Tax Defenders
Understanding how far back the IRS can audit and the factors that can extend the audit period is crucial for taxpayers. By maintaining accurate financial records, organizing them systematically, and seeking professional help when needed, you can minimize the risks associated with an IRS audit.
If you’re concerned about a potential IRS audit or need assistance with any tax-related issues, The Tax Defenders are here to help. Contact us today at (312) 345-5440 for a free attorney consultation, and let our experienced team guide you through the complexities of the IRS audit process.
Related questions
How far back can tax evasion be investigated?
In an instance of purported tax evasion, the statute of limitations does not expire if the accused is charged within six years of deliberately attempting to dodge or circumvent any tax or its payment in any way. However, in certain situations, the statute may be “suspended,” causing the clock to stop ticking. For instance, the statute’s countdown halts if the subject is abroad or considered a fugitive.
However, as time passes, it may become more challenging for the IRS to gather sufficient evidence to prove tax evasion. In addition, taxpayers should be aware of the specific record-keeping requirements in their jurisdiction, as this can impact the availability of evidence during an investigation.
If you have concerns about potential tax evasion or need assistance with tax-related issues, you should seek professional advice from a tax attorney or an experienced tax professional.
Can the IRS come after you after 10 years?
The IRS generally has a 10-year statute of limitations period, known as the collection Statute Expiration Date (CSED), to collect on outstanding tax liabilities, including unpaid taxes, penalties, and interest. Note that these are civil collection issues, not criminal. This 10-year period begins on the date the tax is assessed, which is typically when the tax return is filed, or when the IRS makes an additional assessment in the case of an audit or amended return.
However, there are certain circumstances that can extend or pause the 10-year collection period:
- Bankruptcy: The collection period is suspended while the automatic stay is in place during a bankruptcy proceeding, and for an additional six months after the stay is lifted.
- Offer in Compromise: The collection period is suspended while an Offer in Compromise is being considered by the IRS and during any appeal period.
- Collection Due Process (CDP) Hearing: The collection period is suspended while a CDP hearing is pending and during any subsequent appeals.
- Installment Agreements: The collection period is generally not suspended during an installment agreement but can be extended if the taxpayer defaults on the agreement.
- Innocent Spouse Relief: The collection period is suspended while a request for innocent spouse relief is being considered.
After the 10-year period expires, the IRS is generally prohibited from collecting the outstanding tax liability. However, you must be aware of any factors that may extend or pause the collection period in your specific situation. If you’re unsure about your tax liabilities or need assistance with tax-related issues, consult a tax attorney or a tax professional for guidance.
Can the IRS go back 15 years?
In most cases, the IRS cannot go back 15 years to audit or collect taxes. The standard audit period is three years from the date you filed your tax return or the return’s due date, whichever is later. However, there are specific situations in which the audit period can be extended.
As for collecting outstanding tax liabilities, the IRS generally has a 10-year CSED window from the date the tax is assessed. However, certain circumstances can pause or extend the 10-year collection period, such as bankruptcy, Offer in Compromise, Collection Due Process Hearing, or Innocent Spouse Relief.
Although it is rare for the IRS to go back 15 years, you should be aware of factors that may extend or pause the audit or collection periods. If you have concerns about your tax situation, consult a tax attorney or a tax professional for guidance.
What is the IRS 6 year statute of limitations rule?
The IRS 6-year rule refers to a specific circumstance in which the IRS can extend the standard three-year audit period to six years. This extended audit period comes into play when a taxpayer substantially understates their income on their tax return.
According to the Internal Revenue Code, if a taxpayer omits more than 25% of their gross income on their tax return, the IRS has the authority to audit that return for up to six years from the date the return was filed or its due date, whichever is later. The purpose of this extended audit period is to provide the IRS with sufficient time to uncover significant income discrepancies and ensure that taxpayers are accurately reporting their income.
The six-year rule does not apply to every taxpayer, but only to those who have substantially understated their income, as defined by the 25% threshold. If you have concerns about your tax situation or need assistance with tax-related issues, consult a tax attorney or a tax professional for guidance.
What happens if you get audited (IRS examination) and don’t have receipts?
If you get audited by the IRS and do not have receipts to substantiate the deductions, credits, or expenses claimed on your tax return, it can create some challenges. However, there are steps you can take to mitigate the potential consequences:
- Look for alternative documentation: Even if you do not have the original receipts, you may still have other records that can support your claims. For instance, you can use bank statements, credit card statements, invoices, or canceled checks as evidence of your expenses. Additionally, you might be able to obtain duplicate receipts from vendors or service providers.
- Reconstruct records: If you cannot find any alternative documentation, consider reconstructing your records. You can create a written summary of your expenses, including the date, amount, and purpose of each expense. While reconstructed records are not as strong as original receipts, they may still provide some support for your claims during an audit.
- Reasonable explanation: If you have a reasonable explanation for why you do not have the required receipts, make sure to communicate this to the IRS auditor. They may take your explanation into account when making their determination.
- Seek professional assistance: Make sure you seek guidance from a tax attorney, certified public accountant (CPA), or enrolled agent, who can help you navigate the audit process and provide valuable advice on how to present your case to the IRS.
If the IRS disallows your deductions, credits, or expenses due to insufficient documentation, you may be subject to additional taxes, penalties, and interest. Therefore, you should maintain accurate records and keep them for the appropriate time period to protect yourself in case of an audit.
If you need assistance with an IRS audit or have concerns about your tax situation, consider contacting a tax professional or attorney for guidance.
