If you’re like most taxpayers, you dread the possibility of undergoing an audit by the Internal Revenue Service (IRS). No matter how careful you are about filing and paying your taxes, it’s still possible to make a mistake, and an error on your return may result in an IRS audit.
Even if you’re familiar with the audit process, it’s likely that you still have some questions about this issue, including how far back the IRS can audit. Here is some information to help you understand how far back the IRS can audit you, and how you should respond if you find yourself dealing with tax debt.
Audit Statute of Limitations
As a taxpayer, it’s important to understand that there is a statute of limitations that dictates how long the IRS has to initiate an audit. Generally, the IRS has three years to audit you, and this time period can start from one of two dates:
1. The due date of your tax return. Most years, this date will be April 15. So, if your tax return was due on April 15, 2016, the IRS would have until April 15, 2019, to initiate an audit.
2. The date you filed your tax return. If you have applied for an extension on your tax return, the audit statute of limitations is also extended. An extension gives an extra six months to file your return, so if you filed your return on Oct. 15, 2015, an audit is possible until Oct. 15, 2018.
Auditing Six Years Later
For most taxpayers, the three-year statute of limitations for audits by the IRS will apply. Unfortunately, there are some circumstances where the three-year time period can be extended to six years, and sometimes longer.
In Section 6501 of the IRS Code, there is a six-year audit statute of limitations that applies in certain circumstances. If the IRS finds that you have substantially underreported your income, this six-year time limit will apply instead of the traditional three years. For this statute of limitations to apply, you would need to understate your taxable income by at least 25%. Intentionally underreporting your taxable income may result in several consequences:
If you have offshore income, this can also impact how long the IRS has to begin an audit. The IRS will also have a six-year statute of limitations if you have foreign income of more than $5,000 and do not report this income on your tax return. You may also face criminal penalties for not reporting foreign income.
Remember that the statute of limitations for audits is different from the length of time that the IRS has to collect your taxes. After an assessment, the IRS has a 10-year statute of limitations on collecting your taxes.
No Statute of Limitations
You should also be aware that there are circumstances where the IRS is not bound by any statute of limitations. In these situations, there’s an unlimited time period to start an IRS audit. Taxpayers involved in one of these situations should consider hiring legal representation as soon as possible.
A failure to file a tax return is the most common situation where the IRS can request an audit without having to comply with a statute of limitations. If the due date of your tax return is approaching and you know you won’t be able to file on time, you should request an extension instead of not filing a return.
If your tax return is fraudulent, the ability of the IRS to audit you is not restricted by a statute of limitations. The agency can audit you at any time, and you may face other very serious consequences. Filing a fraudulent tax return may result in a prison sentence of up to three years and $100,000 fine.
Extending the Statute of Limitations
If the end of the statute of limitations is nearing, it’s possible that the IRS will send you Form 872 (Consent to Extend the Time to Assess Tax). Signing and returning this form to the IRS means you are agreeing to extend the statute of limitations, meaning you are giving the agency extra time to request an audit. Before you return Form 872, you should talk with a tax attorney. In most cases, sending back this form means that the statute of limitations will be extended indefinitely, which is rarely beneficial for the taxpayer.
Responding to an Audit
After receiving a notice that you’re being audited by the IRS, it’s important that you respond the right way. First, you need to read the letter you have received carefully. In some cases, the IRS won’t audit your entire tax return and will only want to review a portion of your return. If this is the case, the auditing process should be much simpler.
Next, you need to determine what type of audit the IRS is requesting. There are four different types of audits, and knowing which you will face will help you to prepare.
Once you know what type of audit you’re dealing with, it’s time to prepare. Collect any related documents that you will need for the audit and make copies. You should never send original documents to the IRS. Only send what the agency has requested. Sending more than you are asked for has the potential to increase the audit’s scope. Finally, make sure that you respond to any requests as quickly as you are able.