Understanding the timeframe for IRS audits

August 05, 2024 | by Atherton & Associates, LLP

One of the most common questions taxpayers have about IRS audits is, “How far back can the IRS audit me?” Understanding the statute of limitations and the circumstances that may extend this period is crucial for maintaining proper tax records and ensuring compliance.

In this article, we’ll provide an overview of audit timeframes and explain the legal and practical aspects of an IRS audit.

Audit basics

An audit is a review or examination of an individual’s or organization’s financial information and accounts to ensure accuracy in reporting according to tax laws. The purpose of an audit is to verify the reported amount of tax. It does not always suggest a problem; sometimes, it can be a random selection or a computer screening based on a statistical formula.

If you are selected for an audit, the IRS will notify you by mail, not by telephone. The audit can be managed either by mail or through an in-person interview to review your records. The length of an audit varies depending on the complexity of the issues, the availability of information requested, and your agreement or disagreement with the findings.

The general rule: three-year statute of limitations

In most cases, the IRS has up to three years from the date you file your tax return to initiate an audit. This period starts from the date you filed your return (or April 15, whichever is later) to charge you additional taxes. For example, if you filed your 2020 tax return on April 15, 2021, the IRS generally has until April 15, 2024, to audit that return. If you requested an extension and filed your 2020 tax return in October 2021, the IRS would have until October 2024 to audit the return.

In practice, however, the IRS tends to open and close an audit within 26 months after the return was filed or due. This internal policy helps ensure that the audit and other processing needs are completed within the three-year timeframe.

However, these rules aren’t absolute, and the IRS can extend the audit period under certain circumstances.

Exceptions to the three-year rule

While the three-year statute of limitations covers most situations, several exceptions extend this period:

• Substantial understatement of income: If you underreport your income by more than 25%, the IRS can audit you for up to six years. This rule aims to address significant discrepancies that could indicate tax evasion.

• Unreported foreign income: If you have unreported income from foreign sources exceeding $5,000, the IRS can audit you for up to six years. This extension is part of the IRS’s efforts to combat offshore tax evasion.

• Failure to file a return: If you fail to file a tax return, there is no statute of limitations. The IRS can audit you at any time, regardless of how many years have passed since the tax year in question.

• Fraud or willful evasion: In cases where the IRS suspects fraud or intentional tax evasion, there is also no statute of limitations. The IRS can investigate and audit your returns indefinitely to uncover fraudulent activities.

The timeframe also varies depending on the type of audit conducted by the IRS. Some audits, particularly those focusing on tax credits, start a few months after you file your return. Others, often related to questionable items on your return, generally start within a year after you file. The most comprehensive IRS audits, known as field audits, can start later.

Practical tips for taxpayers

Dealing with the IRS in an audit can be challenging. Here are some practical tips to keep in mind:

• Maintain records: keep all tax records, including receipts, bank statements, and other relevant documents, for at least seven years. This practice covers you for most audit scenarios, including the six-year extension for substantial underreporting.

• Accurate reporting: ensure all income is accurately reported on your tax returns. Double-check your numbers and consider professional help if your tax situation is complex.

• Respond promptly: if you receive an audit notice, respond promptly and provide the requested documentation. Delays or failure to respond can escalate the situation and result in penalties.

• Professional advice: consult a tax professional if you have concerns about past returns or potential audit risks. They can provide guidance tailored to your specific circumstances.

By understanding the IRS audit timelines and maintaining diligent records, you can reduce the stress and uncertainty associated with potential audits. Keeping accurate and comprehensive documentation not only ensures compliance but also provides peace of mind.

For personalized assistance and to ensure your records are in order, reach out to one of our professional advisors. We can help you navigate complex tax laws and stay compliant and prepared for any IRS inquiries.