how far back can the irs audit

Only a few other phrases in the English language can send a shiver of fear down one’s spine. One such phrase is “IRS audit.” The Internal Revenue Service (IRS) is a powerful branch of the government and enforces tax laws enacted by congress. They have almost unlimited means to enforce the tax law, making them an intimidating force for most hard-working taxpayers. Nobody wants a run-in with the IRS. However, if you find yourself in the hot seat with the IRS, it isn’t necessarily the end of the world. The most important thing to do is stay calm and seek advice from your tax advisor. But how far back can the IRS audit? Here is what you need to know.

How far back can the IRS audit me?

An IRS audit is an examination or investigation into the financial records of an individual or organization to ensure all reported information from their tax returns is accurate. There are a variety of reasons why the IRS may need to audit you. Typically, an audit starts through mail correspondence. Once the process has started, the IRS may conduct the audit through mail or in-person interviews. Correspondence audits are the most common form of IRS audit. These audits arise when the IRS needs additional information about your tax return. In-person audits are a little more serious and typically require a more in-depth conversation with the IRS to review your information. In the end, most tax audits have a simple resolution.

What is the typical statute of limitations for a tax return?

You may be wondering about the statute of limitations for your taxes which is typically three years. However, if the IRS finds grave errors during the audit process, the statute of limitations allows them to go back for six years. If there’s an instance of an unfiled return and the IRS detects fraud, there is no time limit, and they can go back indefinitely. The IRS aims to conduct its audits as soon as possible after you file your tax returns. Typically the audit timeline is around two years. Keep in mind there are millions of taxpayers, so it may take time to verify everyone’s return.

how far back can the irs audit

Why would the IRS audit me or my business?

As mentioned, there are a variety of reasons the IRS needs to audit. Mathematical errors are one of the top reasons the IRS wants to take a closer look at your return. Some other triggers include:

  • Under-reporting income – When it comes to filing your tax return, honesty is always the best policy. The IRS frowns on failure to report income, and under-reporting for taxes can end up costing you more in the long run. Plus, you have to deal with the arduous task of going through a tax audit.
  • Claiming too many business deductions – Everyone wants to save money on their tax bill, and deductions are a great way to do this. However, baseless and excessive deductions will get the IRS’s attention. Make sure your deductions are legit before preparing your return.
  • Claiming the home office deduction – The home office deduction often raises a red flag. To qualify, you must have space solely dedicated to your business. A spot on your countertop or kitchen table does not qualify.
  • Claiming an abundance of charitable donations – Philanthropy is a great thing. It allows you to give back to your community and support causes you care about. It can also help when you are looking for some tax savings. Excessive donations that don’t align with your income could draw the attention of the IRS. If you are going to make charitable donations and claim them on your taxes, make sure you have the proper documentation in case the IRS wants to take a closer look. Also, make sure the organization has tax-exempt status, which you can look up here.
  • Claiming too many losses on schedule C – It may be tempting for self-employed taxpayers to hide some of their income by reporting more losses. However, the IRS may wonder how your business is staying afloat if you have too many losses. Keep in mind that the IRS only allows you to claim losses for three out of five tax years.

Taxpayers in a higher income bracket are also more likely to go through a tax audit because they are more likely to have more deductions. Additionally, low-income taxpayers may be subject to more frequent IRS audits due to earned income tax credit.

What should I expect if I’m audited?

When the IRS initiates a tax audit, they start by notifying you with a written letter. Sometimes the IRS wants clarification on something that raised a red flag. For example, if you claimed many charitable donations, they may ask to see receipts and records of the transaction. Most IRS audits result from the IRS wanting more information from the taxpayer, and these are typically conducted by mail. If the IRS deems that you owe additional taxes, they will send you statutory notice of deficiency. In this instance, you have 90 days to file a petition with the US tax court. Failure to meet the 90-day deadline will result in the IRS ending the audit the begin collection efforts. If the IRS wants to conduct an in-person audit, they will set an appointment to meet with you at your home or office.

How far back can the IRS audit tax returns?

Generally, the statute of limitations for an IRS audit is three years. However, if they find substantial errors on your tax return, they can go back as far as six years. As mentioned before, the IRS likes to conduct audits on time, so most audits happen within two years. As a precaution, it is a good idea to maintain all financial documents for seven years. This will cover a significant period of time should you have a longer statute of limitations on your audit. Sufficient supporting documents will be your best friend in the event of an audit.

Can the IRS audit you for more than three years?

If the taxpayers fail to file taxes or file a fraudulent tax return, the IRS will deem that the three-year statute never started because the tax return was invalid. Therefore, they can go back indefinitely, and the statute of limitations has no limit.

Final Thoughts

While intimidating, most audits are not severe. They are often only because the IRS needs supporting documents to validate your claims and support your deductions, such as receipts and financial records. If they discover a lot of errors, they may choose to go back as far as six years. This isn’t necessarily the end of the world. However, you should consult with a tax attorney before moving forward. The tax law can be complex, and getting a professional opinion can save you time, money, and stress.

Get Help With Your Taxes

The deadline to file your tax return is quickly approaching. If you haven’t filed already, now is a good time to do so. Working with a tax advisor does not eliminate your chances of going through an audit, but it does help improve the accuracy of your tax return. They also can ensure that you get the deductions and tax credits that apply to your tax situation. Schedule a strategy session with one of the tax experts at Shared Economy today to learn more. For more tax tips, subscribe to our newsletter below.

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