Can the IRS Investigate Tax Returns Older Than 3 Years? Exceptions

Can the IRS Investigate Tax Returns Older Than 3 Years? Exceptions

The IRS typically has 3 years from when you file your tax return to audit it and assess additional tax. But there are important exceptions that give the IRS more time – sometimes unlimited time. Understanding these exceptions is key to knowing how long your tax returns remain open to IRS scrutiny.

The normal statute of limitations for the IRS to audit a tax return is 3 years from the date the return was filed. For example, if you filed your 2018 tax return on April 15, 2019, the IRS generally has until April 15, 2022 to audit it[1]. After that, the IRS is prohibited from initiating an audit or making an assessment of additional tax.

This 3-year statute of limitations gives taxpayers certainty that after some period of time, their tax return will be closed and no longer subject to review. It also encourages the IRS to conduct audits soon after a return is filed, when records are more readily available. Without a statute of limitations, tax returns would remain open to audit indefinitely[2].

However, there are a number of important exceptions that can extend or eliminate this 3-year statute of limitations[3][4][5]:

If You Underreport Income by 25% or More

If a taxpayer omits from their return an amount of gross income that is more than 25% of the gross income reported on the return, the IRS has 6 years to assess additional tax[3].

For example, if you reported $40,000 of income on your tax return, but omitted an additional $15,000 of income – which is more than 25% of $40,000 – the IRS would have 6 years instead of 3 years to audit your return.

This exception is designed to discourage taxpayers from significantly underreporting their income. The IRS takes the position that if you’ve understated your income by more than 25%, they should have additional time to uncover other potential issues[2].

No Limit if You Never File a Return or File a Fraudulent Return

If you never file a tax return at all, or if you file a fraudulent return with the intent to evade tax, the IRS has an unlimited amount of time to audit your return and assess tax[3].

There is no statute of limitations in these situations. The IRS can initiate an audit or assess additional tax at any point in the future.

For example, if you simply chose not to file a return in 2018 and the IRS discovers this in 2030, they can still audit your 2018 liability at that time. Or if you intentionally omitted substantial amounts of income from your reported 2018 income in order to evade tax, the IRS could potentially audit your 2018 return in 2040 and assess tax on the unreported income.

Changing the Reported Tax Due

If you file an amended return or if the IRS makes certain adjustments that impact the amount of tax due, the statute of limitations may be extended[4].

For example, if you originally reported $5,000 of tax due on your 2018 return, but then in 2021 you filed an amended 2018 return showing $7,000 of tax due, the IRS would have until 2024 to audit your amended 2018 return. The statute is extended in this case to give the IRS additional time to verify the additional tax you reported as due.

Filing Refund Claims

If you file a claim for refund, the IRS generally has 3 years from the time you filed the claim for refund to review it and make any adjustments[5].

For example, if you filed an amended 2018 return in 2021 claiming an additional refund, the IRS would have until 2024 to disallow any improper refunds claimed on that amended return.

This allows the IRS adequate time to ensure refund claims are proper before issuing refunds.

When Tax Was Paid

The IRS also has additional time equal to the period of any extension of time for payment of tax[3].

For example, if you owed $5,000 on your 2018 return filed in April 2019 but did not fully pay the liability until April 2021 under an approved IRS payment plan, the IRS would have until April 2024 to audit your 2018 return and assess any additional tax. The statute is extended in this case to account for the additional time you had to pay the tax due.

Takeaways

• The IRS typically has 3 years to audit a tax return and assess additional tax.
• This period is extended to 6 years if a taxpayer omits over 25% of their gross income.
• There is no statute of limitations if a taxpayer never files or files a fraudulent return.
• The statute of limitations can also be extended by filing refund claims or extending the time to pay tax due.
• Understanding these statute of limitations rules can help taxpayers know if their prior years’ returns are still open to audit.

The statute of limitations provides important protections for taxpayers against unlimited IRS audits. But taxpayers should be aware of exceptions that can extend or eliminate the statute of limitations – especially if they have underreported income, filed refund claims, or extended time to pay taxes due[6].

Consulting with a tax professional can help you determine how long your specific tax returns remain open to IRS scrutiny. Careful recordkeeping is also essential, since the IRS can still request records from prior years if they are within the applicable statute of limitations.

References:

[1] https://www.irs.gov/businesses/small-businesses-self-employed/irs-audits

[2] https://www.americanbar.org/groups/business_law/resources/business-law-today/2017-august/irs-can-audit-for-three-years/

[3] https://www.irs.gov/businesses/small-businesses-self-employed/how-long-should-i-keep-records

[4] https://www.irs.gov/taxtopics/tc305

[5] https://www.irs.gov/irm/part25/irm_25-006-001r

[6] https://www.bragertaxlaw.com/how-many-years-back-can-the-irs-go-in-its-search-for-tax-fraud.html