Tax season is a stressful time for many individuals and businesses. Doing your taxes and making sure that everything is reported correctly, with the looming possibility of an IRS audit adds an extra layer of anxiety. One common question that often arises is: How far back can the IRS audit you? Understanding the statute of limitations on tax audits is important for taxpayers to know their rights and responsibilities.
Let’s get into the rules governing the IRS audit timeline and what factors can extend or limit the statute of limitations.
Statute of Limitations Overview
The statute of limitations refers to the timeframe within which the IRS can initiate an audit or pursue legal action against a taxpayer for a specific tax year.
Generally, the IRS has three years from the date a tax return is filed to audit that return. However, several factors can extend or suspend this timeframe, allowing the IRS to audit tax returns beyond the standard three-year window.
If the IRS suspects you underreported your income by 25% or more, they have six years to audit you. In cases of suspected fraud or if you didn’t file a tax return at all, there’s no statute of limitations, meaning they can audit you at any time. It’s essential to keep accurate records for at least seven years to be prepared for any potential audits.
Standard Three-Year Limit
For most taxpayers, the statute of limitations for IRS audits is three years from the date the tax return was filed. This means that once three years have passed since the filing date, the IRS typically cannot initiate an audit for that tax year, barring any exceptional circumstances. This standard time frame provides taxpayers with a sense of closure and certainty regarding their past tax filings.
Exceptions to the Three-Year Limit
While the standard statute of limitations is three years, there are several exceptions that can extend this timeframe, giving the IRS additional time to audit a taxpayer’s returns. Some of the key exceptions include:
- Substantial Understatement of Income: If the IRS believes that a taxpayer substantially understated their income by 25% or more, the statute of limitations is extended to six years from the date the return was filed. This extension allows the IRS additional time to uncover and address significant discrepancies in reported income.
- Failure to File a Return or Fraud: If a taxpayer fails to file a tax return or commits fraud by intentionally underreporting income or overstating deductions, there is no statute of limitations. In other words, the IRS can audit these returns at any time, regardless of how many years have passed since the filing date. This provision ensures that individuals cannot evade tax obligations through fraudulent means.
- Unreported Foreign Income: Taxpayers who fail to report foreign financial accounts or income may face an extended statute of limitations. The Foreign Account Tax Compliance Act (FATCA) requires taxpayers to disclose certain foreign financial assets, and failure to do so can result in an extended statute of limitations.
Record-Keeping Recommendations
Keeping accurate tax records is crucial, especially since statutes of limitations may extend. For this reason, it is recommended that taxpayers keep supporting documentation for at least seven years after completing their tax returns. Tax returns must be supported by evidence such as receipts, invoices, bank statements, and other financial documents. Taxpayers should keep these records in the event the IRS audits or inquires about their tax filings.
Check out important IRS forms that all employers should know about. Whether you are a small business or corporation, knowing about these forms can help you avoid errors and save time.
Conclusion
Taxpayers may be audited by the IRS and sued for unpaid taxes within the timeframe set by the statute of limitations. Statutes of limitations generally expire three years after the filing date of a tax return, but there may be exceptions when income is underreported or returns are not filed.
Understanding these rules and maintaining accurate tax records are essential for taxpayers to file their taxes confidently and eliminate the risk of IRS audits. By staying informed and proactive, taxpayers can ensure compliance with tax laws and minimize the likelihood of audit-related stress.
