15 Sep 23

How Far Back Can the IRS Investigate Tax Returns? Statute of Limitations

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Last Updated on: 16th September 2023, 10:22 pm

How Far Back Can the IRS Investigate Tax Returns? Statute of Limitations

Paying taxes is a part of life – we all have to do it. But the thought of getting audited by the IRS is scary. No one wants the tax man knocking on their door and asking to see years of old receipts and paperwork. So how far back can the IRS actually go to audit your tax returns? The answer depends on a few key factors.

The General Rule: 3 Years

In most cases, the IRS can only audit the last 3 years of filed tax returns. This is because of the basic federal statute of limitations for tax audits. The statute sets a time limit for the IRS to audit returns and assess additional tax. The clock starts ticking on the day you actually file your return, not the tax deadline. For example, if you filed your 2018 taxes on April 15, 2019, the statute expiration would be April 15, 2022.

This means the IRS generally has only 3 years to initiate an audit and dispute anything on your tax return. If an audit isn’t opened by the time the statute runs out, you’re home free. The IRS accepts your return as filed, and can’t come back later to challenge it (with a few exceptions, which I’ll get to shortly).

The 6 Year Rule for Substantial Understatement

There are a handful of exceptions that give the IRS 6 years to audit you instead of 3. The most common is when you substantially underreport your income on a return. This means understating your income by more than 25%. Say you made $100,000 but only reported $70,000. That’s a $30,000 understatement – much more than 25% of your actual income. In cases like this, the IRS gets double the normal time and now has 6 years to audit you.

The 6 year clock starts running the day you file the return with the substantial understatement. If you file on April 15, 2019 but substantially underreport your income, the IRS can open an audit up until April 15, 2025.

No Limit for Tax Fraud

In cases of suspected tax fraud, the IRS has unlimited time to audit returns. If they believe you intentionally evaded taxes through fraudulent means like hiding income in offshore accounts, there is no statute of limitations. The IRS can investigate as far back as they want to find potential fraud.

The burden of proof is on the IRS to actually prove civil tax fraud, but the threat of an unlimited audit period gives them significant power. If convicted of criminal tax fraud, a taxpayer can face 5 years in prison and steep monetary penalties.

Never Filed a Return? No Limit.

Another exception is if you never got around to filing a tax return at all. The clock doesn’t start running on the statute of limitations until a return is actually filed. If you skip filing your taxes for several years, the IRS has unlimited time to audit each year you failed to file. As soon as you eventually file, the clock will start on the normal 3 year limit for that tax year.

Some people think they can get out of paying taxes forever by never filing a return. That’s not how it works – the IRS can come after you at any time for unfiled returns. And failure to file when required can result in penalties and interest charges.

Filing An Amended Return Extends the Time

When you file an amended tax return, it restarts the clock on the statute of limitations. Let’s say you file your 2018 taxes on time in April 2019. A few months later in 2020 you realize you made a mistake and need to amend the 2018 return. You prepare and file a 1040X amended return.

Filing that 1040X now pushes the statute expiration date out 3 years from the date the amended return is filed. So instead of expiring in April 2022, it gets extended to 3 years after the 2020 amended return. The IRS now has until sometime in 2023 to initiate an audit of your 2018 tax year.

When An Audit Expands to Other Years

If the IRS audits a particular tax return and finds substantial errors, they can expand the audit to include other tax years too. Let’s say they start an audit of your 2018 taxes in 2021 but uncover signs of fraud. They now have the power to expand the audit scope to include 2017, 2016, and earlier years as well.

The IRS needs to follow proper procedures to formally expand an audit to other years. But taxpayers should be aware that an audit of a single year can quickly balloon to include prior tax returns if potential fraud is uncovered.

When the Audit Clock Stops

In some cases, the statute clock may temporarily stop running before the 3 years (or 6 years) is up. This pause button gets hit when the IRS formally contacts the taxpayer about specific issues on a return. If they mail you an official notice regarding an audit, the clock stops on the statute until the issue is resolved.

For example, say you filed a 2018 return on April 15, 2019. The normal statute would expire on April 15, 2022. But the IRS sends you a letter in 2020 flagging issues with some deductions you took. The statute now pauses until you and the IRS resolve the questions raised. This prevents taxpayers from stonewalling an audit until the statute runs out.

Takeaway on Statute of Limitations

The general rule is the IRS has 3 years to audit after you file a return. But many exceptions can extend this period or eliminate it altogether. Substantial underreporting of income gets the IRS 6 years. Fraud means no statute of limitations. And if you never file a return, the IRS can audit whenever they want.