How Far Back can the IRS Audit You?

How Far Back can the IRS Audit You?

How Far Back can the IRS Audit You: A very common question amongst taxpayers is: “How far back can the IRS audit me?” In other words, how long before a taxpayer is off the hook for mistakes made in previously filed tax returns. The statute of limitations for IRS audits and examinations will vary depending on the nature of the tax violation.

Under most circumstances, the Internal Revenue Service has three (3) years to audit a taxpayer.

When there is substantial underreporting and/or more complicated issues such as unreported foreign income, the IRS generally has six (6) years to initiate a tax audit.

If the IRS believes civil fraud is involved, the Internal Revenue Service may have an unlimited time to enforce civil tax fraud violations.

Let’s go through some of the basics about the IRS audit timeline and just how far back the IRS can go.

When does the Tax Return Audit Statute Start Running?

One very important piece of information keep in mind is that the statue limitations does not begin to run until after the tax return has been filed. And, the statue of limitations does not shorten just because the taxpayer files a late tax return.

Three (3) examples of IRS Audit Statutes:

Here are three common tax filing scenarios:

Nicole filed Taxes Early

Nicole filed her 2018 tax return on March 1, 2019.

The IRS has three years to audit Nicole.

Even though Nicole filed before the April 15th due date, the IRS still has three years from the 4/15 due date to audit Nicole.

In other words, filing a tax return early (before the deadline) does not shorten the statute of limitations for audit.

Nicole Filed Taxes Late

Nicole filed her 2018 tax return on September 9, 2019 – but had not applied for an extension.

The IRS gets three years from the date Nicole filed the tax return in September. 

In other words, the statue of limitations does not shorten just because Nicole father tax return late.

Nicole Never Filed her Tax Return

If Nicole never files her 2018 tax return, then the statute of limitations for the IRS to audit her for that year will not expire.

In other words, a taxpayer cannot run out the audit clock simply by not filing a tax return.

3-Year IRS Audit Statute of Limitations

Generally, the IRS has three (3) years to audit a taxpayer’s tax return.

Therefore, Taxpayers must sweat it out for three years after filing the return before knowing whether or not the coast is clear. 

It is also important to note that the IRS has several tricks up its sleeve to circumvent his roles and extend the statue.

For example, even if a tax return was filed timely, if there are PFIC requirements and the form 8621 was not properly filed — the tax return remains open — at least to the portion referring to the PFIC.

You can best believe the IRS will try to audit other portions of that year’s tax return — and relate it back to the PFIC issues.

6-Year IRS Audit Statue of Limitations

Not all statutes are limited to just three years.

There are some statutes in which the IRS may seek six years to audit or examine a tax return.

Two very common scenarios in which the IRS has six years to audit a tax return is when there is significant amounts of underreported income or over embellished adoptions which significantly increases the tax liability, and when the taxpayer has more than $5000 of unreported income stemming from certain foreign assets.

In the latter scenario referring to foreign income, it does not include all foreign income.

5-Year IRS Criminal Statute (Varies)

The IRS is not the government agency tasked with taking criminal matters to court and pursuing criminal prosecution against taxpayers.

Generally, if the IRS believes there is a criminal tax matter (such as evasion or money laundering), the first step is to refer the case to the IRS special agents for an investigation.

In general, criminal tax statutes are five years.

Unlimited IRS Audit Statute of Limitations

If the Taxpayer never files a tax return for a the tax year at issue, the statute of limitations does not being run for that tax return.

In some very limited situations, even if the Taxpayer files a tax return, the IRS may still have an unlimited time to audit the taxpayer if they believe civil fraud involved; the Internal Revenue Service takes tax fraud very seriously.

Since the penalties for tax fraud can be tough (75%), the U.S. government must meet a higher burden of proof to prove the fraud.

While most civil tax violations require the U.S. government to prove a preponderance of the evidence, which is equivalent to more likely or not (estimated at 51%), in order for the government to prove tax fraud they must show clear and convincing evidence.

The clear and convincing evidence standard is estimated at 75%.

IRS Audit & Examination vs Enforcement

It is important to note that there is a difference between auditing or examining a taxpayer, and enforcing the tax liability.

For example, if the IRS pursues enforcement, obtains a judgment, registers the judgment in multiple states where the Taxpayer has assets, and timely renews the judgments before expiration (usually 10-years), enforcement may continue in perpetuity.

The IRS has many enforcement tactics available in order to pursue tax debts (and penalties) against taxpayers.

Some examples, include:

• Levy
• Lien
• Seizure
• Passport Revocation

Out of Compliance with the IRS?

If a taxpayer has not properly filed their tax returns in prior years, there are many options available to get safely into compliance.

Examples include: Voluntary Disclosure Program (Offshore & Domestic), Streamlined Filing Compliance Procedures, Delinquency Procedures, and Reasonable Cause.

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