How Far Back Does the IRS Audit for Unfiled Returns?

How Far Back Does the IRS Audit for Unfiled Returns?

Figuring out how far back the IRS can audit for unfiled returns is a tricky question. There’s no simple answer, since it depends on a bunch of factors. But don’t worry – I’ll walk you through what matters and try to keep it simple!

First thing’s first: The IRS can audit returns from many years ago. There’s no statute of limitations on auditing if you never filed a return. So if you skipped filing your taxes in 2005, the IRS could still audit you for that year in 2023! Crazy right?

Now, just because there’s no time limit doesn’t mean the IRS will audit super old returns. They tend to focus on more recent unfiled returns for a couple reasons:

• The IRS has limited resources, so they prioritize more recent tax years.
• Older returns usually have less tax impact. Income and tax rates were lower in the past.

But don’t assume you’re in the clear for really old unfiled returns! The IRS still may audit those years if they think you owe a lot of tax. For example, if you sold valuable assets or came into a large inheritance years ago and never reported it.

The IRS Audit Selection Process

Wondering how the IRS decides which returns to audit? It’s not random – they use computer programs to flag returns with a high chance of owing extra tax. Some red flags include:

• Unreported income from 1099 forms
• Businesses operating in cash
• High expenses compared to similar taxpayers
• Math errors

For unfiled returns, the IRS may look for gaps where you didn’t file. Or search databases for evidence you had income but didn’t report it. They also use data mining to profile non-filers and identify audit targets.

Statute of Limitations vs. Assessment Statute

There’s an important difference between the statute of limitations and the assessment statute – it’s tricky but important!

The statute of limitations is how far back the IRS can audit. For unfiled returns, there is no limit. But for filed returns, the limit is usually 3 years.

The assessment statute is different. It’s how long the IRS has to assess additional tax after completing an audit. For example, if you filed a 2018 return and the IRS audits in 2022 (within the 3 year limit), they then have 1 additional year until 2023 to finalize the audit and bill you any additional tax.

For unfiled returns, the assessment statute doesn’t start until you actually file the delinquent return. So if you don’t file, the IRS has unlimited time to audit and assess tax.

When Does the Audit Clock Start?

Another tricky question is when the audit clock starts ticking. Usually, it’s based on the normal filing deadline. But for unfiled returns, there is no filing deadline so it works differently.

The audit statute begins either:

• When a substitute return is created by the IRS, or
• When the taxpayer actually files the late return

This prevents taxpayers from avoiding audits by never filing. The IRS can prepare a substitute return at any time and start the audit clock.

What If You Owe a Lot to the IRS?

If you get audited for unfiled returns and owe big tax bills, don’t panic! The IRS is usually pretty reasonable in working out payment plans and settlements.

Some options if you owe a lot:

• Installment agreement – Pay over 6 years
• Currently Not Collectible status – Pause collections temporarily if you can’t pay
• Offer in Compromise – Settle for less than you owe
• Penalty abatement – Ask to reduce penalties

The IRS wants to collect what you owe, but they’d rather work with you than force aggressive collections. So don’t be afraid to ask for help – the worst they can do is say no!

Takeaways

Dealing with unfiled returns from years ago can be stressful. But hopefully this info helps provide some clarity on how far back the IRS can audit and assess tax.

The key points to remember are:

• No statute of limitations on audits for unfiled returns
• IRS focuses audits on more recent unfiled years, but could go back further
• Assessment statute doesn’t start until a return is filed
• Substitute return from the IRS can trigger audit and assessment statutes
• If you owe a lot, payment plans and settlements may be available

Dealing with past unfiled returns is never fun, but it’s much easier if you get compliant voluntarily before the IRS catches up to you. Consider consulting a tax pro who can help you get caught up while minimizing penalties and stress!