If the IRS finds an error or other problem with your tax return, it has the ability to begin the audit process up to three years after the return’s original due date or after the date when you actually filed the return, if you filed an extension.
Should the IRS find that you have certain characteristics in your tax situation, there are exceptions to this three-year limit, allowing the IRS to go back as far as six years. In extreme cases, like when fraud has occurred, the IRS may not have to abide by a time limit at all.
If you are in a situation where the IRS is attempting to audit your tax returns up to or beyond the three-year window, this indicates you are facing an especially aggressive and tough audit. You will want to consider hiring representation to give yourself the best chance of meeting these charges head-on, and where necessary, push back against the IRS agents.
When you are facing a tax audit, contact the Tax Law Offices of David W. Klasing today to schedule a 10-minute reduced rate initial consultation with an experienced Tax Attorney. We know exactly what rules the IRS must follow when initiating, concluding and litigating an audit, and we will not let IRS employees violate your rights.
The Three-Year “Default” Rule: Baseline but Not a Safe Harbor
Under IRC §6501(a), the IRS ordinarily has three years from the later of (1) the due date of a tax return or (2) the date it is filed to assess additional tax. For calendar-year individuals, that usually means three years from April 15 of the following year—unless the return was filed late, in which case the three-year clock starts on the late-filing date. This baseline applies to income, estate, gift, excise, and most employment taxes. It also sets the timetable for the IRS to (i) issue a formal Notice of Deficiency (the “90-day letter”) and (ii) for you to plan strategic defenses or negotiate a quick closing agreement.
Three years sounds finite, but our seasoned practitioners know it is fluid in practice. A timely filed return can sit for 30 months before the IRS even assigns it to an examiner. Statute-expiration reports circulate inside the IRS each month, alerting agents to cases approaching the deadline. If your file appears to be material or a fraud lead emerges, the IRS will attempt to extend the period before it lapses. Taxpayers who “let the clock run” without consenting, using disciplined document control, occasionally but rarely force the government to close an examination with no change—or with a narrower adjustment constructed from the data already in hand. Conversely, sloppy record production or vague answers can prompt an examiner to expand on issues and seek an extension, thereby keeping the return alive.
At the tax law offices of David W. Klasing, our audit-defense protocol always begins with a statute calendar spreadsheet, which includes the original due date, actual filing date, carry-back or carry-forward claims, overseas extensions, pandemic relief days, and any current consent on Form 872. Every move we make—timing an Information-Document-Request (IDR) reply, delaying or advancing a taxpayer interview, even requesting a technical advice memo—is cross-checked against the running statute. Knowing the exact “drop-dead” date gives us leverage in negotiations and ensures our dual-licensed Tax Attorneys and CPAs are ready, on day one, to decide whether an extension is genuinely in the client’s interest.
Six-Year Assessments: Substantial Omissions, Basis Overstatements, and Foreign-Asset Gaps
Congress and the courts have expanded the statute to six years in several revenue-raising scenarios. The classic trigger—IRC §6501(e)(1)(A)—is a “substantial omission” of gross income: omitting more than 25 percent of the amount actually reported. A $ 400k earner who fails to report $ 105k of Schedule C receipts meets the threshold. After years of litigation (e.g., Home Concrete and subsequent statutory override), the six-year rule now explicitly covers basis overstatements that inflate gain exclusions. An overstated basis in cryptocurrency or real estate can, therefore, keep a return open twice as long.
Foreign-asset under-reporting adds another six-year hook. Under IRC §6501(e)(1)(A)(ii), the IRS gets six years when a taxpayer omits more than $5,000 of income attributable to assets that must be reported on Form 8938. Similarly, the Surface Transportation Act of 2015 made the six-year period apply to overstatements of foreign tax credits. For taxpayers with offshore accounts, passive foreign investment companies (PFICs), or foreign business interests, the IRS now routinely incorporates the six-year statute into its audit scripts and IDRs, ensuring sufficient time to obtain asset statements from overseas.
Because the IRS rarely alerts taxpayers when it invokes the six-year rule, our dual-licensed Tax Attorneys and CPAs keep track of the IRS’s math. Agents sometimes miscompute the 25 percent omission by using net rather than gross numbers or by ignoring basis when the rule clearly requires comparison to gross receipts. We prepare counter-schedules showing that alleged omissions drop below the 25 percent threshold when properly calculated, reverting the case to three years and cutting the IRS’ window nearly in half. When the facts justify six years, we shift to damage control—limiting the scope, negotiating cutoff dates for IDRs, and tightening the data flow so the agent can complete the investigation quickly without seeking a fraud referral.
When the Clock Never Stops: Fraud, False or No Return, and Listed Transactions
Some returns carry no statute of limitations at all. IRC §6501(c)(1) and (c)(2) permit assessment “at any time” for (i) false or fraudulent returns filed with intent to evade tax and (ii) situations where the taxpayer fails to file. The IRS bears the burden of proving civil fraud with clear and convincing evidence, but it aggressively applies this standard where it uncovers dual books, cash skimming, offshore entity layering, or doctored invoices. In our practice, once an examiner even hints at fraud, we escalate to stringent privilege protocols, limit client contact with the government, and consider remedial strategies, such as a qualified amended return or an IRS voluntary disclosure, before the CI locks in.
Congress has also suspended the statute for specific highly abusive or opaque schemes. IRC §6501(c)(10) allows unlimited time when a taxpayer fails to report certain listed transactions (e.g., abusive conservation easements, micro-captive insurance arrangements) until the taxpayer provides the mandated disclosure. Likewise, partnership items under the pre-2018 TEFRA regime and the new BBA centralized audit system can hold the clock open for years while the partnership-level proceeding runs its course. Effective representation means monitoring those separate clocks and, where possible, decoupling an individual’s statute from an entity-level proceeding that drags on.
Unlimited doesn’t mean inevitable. At the tax law offices of David W. Klasing, our dual-licensed Tax Attorneys and CPAs have negotiated closing agreements under §7121 in fraud-flagged cases that fix liability for closed years and bar further assessments—even though the statute technically remains open. The IRS will sign such agreements when convinced that (a) the civil fraud penalty fully compensates the government, (b) criminal potential is low or time-barred, and (c) the taxpayer’s cooperation is complete. Crafting that narrative and backing it with incontrovertible documentation is finesse work—but it can shut the door on unlimited exposure and restore the client’s peace of mind.
Understanding How an IRS Audit Starts
The IRS will ordinarily open an audit in the majority of cases within two years of the taxpayer’s personal or business filing that triggered the audit. Officially, though, the IRS has three years from the time the taxpayer filed his or her tax return or three years from the original due date of the tax return at issue, whichever date is later, to begin the audit process.
The IRS can reach back beyond three years when looking at your past returns, once it finds certain discrepancies in the initial audit period. A 25% understatement in taxable income will cause a six year look back period to open. Firm indications of fraud will cause an unlimited look back period back to the dawn of time.
Selection for an Audit
The IRS may occasionally select a taxpayer or a business entity for an audit at random but this does not occur often. Rather, the IRS statistically analyses your returns by comparing them to other similarly situated returns. The IRS runs all returns through a computerized screening process that attempts to find returns that have errors / statistical anomalies in them.
To determine baseline values for returns considered normal or average, the IRS performs extensive research on audited returns, to determine what an average return should statistically look like. The IRS constantly updates the statistics in its research program, ensuring it has the latest values to compare against. A taxpayer who earns income in a nontraditional way or who has a larger number of deductions in a certain area than the typical taxpayer is consequently at higher risk for an audit.
The IRS creates statistical analysis buckets of similarly situated returns around principle business activity code that tax preparers choose between in classifying your business. If they choose the wrong code you can be at higher risk for an audit.
As an added problem, if your return is linked to someone else’s return that is going through or went through an IRS audit, your return could be flagged for audit too. The IRS will look for business partners of a party that it is auditing, for example. The way that works is as follows:
IRS chooses and individual to audit. Individual is a shareholder in an S Corp. The IRS audits the S Corp and makes adjustments to it that result in additional income in the years under audit. The IRS will open an audit on the other shareholders in the S Corp initially just to flow through the additional S Corp income to the additional shareholders. The audits can expand from there to other issues the auditor spots within the other shareholders returns.
Notification of an Audit
The IRS ordinarily only informs taxpayers of an audit being opened against them or an entity they own through official postal mail. Ordinarily notification of an audit through email or a phone call from an organization claiming to be the IRS is a scam. Once the IRS has performed its initial notification of the impending audit by U.S. mail, the auditor then may follow up with you directly in a few different ways, including by telephone. Once you inform them you are represented by counsel they are required to direct any additional correspondence with your hired counsel. Your Counsel will need to supply an IRS Power of Attorney first however.
Consents, Tolling Events, and IRS Maneuvers to Keep the Clock Alive
The three- or six-year deadlines are not etched in stone. The IRS almost always asks taxpayers to extend the statute voluntarily via Form 872 (“Consent to Extend the Time to Assess Tax”). Examiners typically float the form about six months before expiration, arguing they need time to finish fieldwork or process information from third parties. Signing a consent is optional, but refusal usually forces the IRS to issue a quick Notice of Deficiency—sometimes based on rough estimates—to protect the statute. Whether to extend is ultimately a strategic call: weigh the examiner’s leverage, your documentation strength, and the odds of a better result in Appeals or Tax Court.
Even without consent, various events toll (pause) the statute. For example:
- Time during which the IRS issues a Statutory Notice of Deficiency, and the 90-day petition period runs.
- Periods when a taxpayer has filed for bankruptcy (plus 60 days after discharge).
- Time the taxpayer spends outside the United States for six continuous months.
- Pending collection-due-process hearings, innocent-spouse claims, or whistleblower office examinations.
Seasoned representatives track these tolling events because miscalculations can invalidate an assessment. We have knocked out six-figure notices by proving the IRS misapplied bankruptcy tolling or miscounted overseas days.
Form 872 consents can be negotiated to limit the extension to specific tax issues or a shorter period (e.g., six months instead of an open-ended extension). We draft amendments that restrain the scope to the item under exam—for instance, “solely adjustments to gross receipts from Schedule C.” The IRS may balk, but if the agent’s case file shows they need only that one issue, managers often approve a targeted consent. The result: the statute stays open just long enough to finish, but your other issues remain closed off. When the IRS refuses a reasonable, narrow consent, we prepare to litigate and leverage the looming deadline to obtain a more favorable Notice of Determination (NOD) or settlement.
Voluntary Extensions
Depending on the circumstances, the IRS may ask the taxpayer to voluntarily grant a time extension on a case-by-case basis using Form 872 (Consent to Extend the Time to Assess Tax). Keep in mind that, with some exceptions, extensions are generally permanent if granted. It is crucial to consult with a tax lawyer before consenting to a voluntary extension of time to assess tax.
Types of IRS Audits
IRS Correspondence Audit
The IRS will perform one of three types of audits. The IRS may perform a correspondence audit by mail when it is requiring you to provide substantiation for positions it is challenging within your tax filings. This is ordinarily the lowest risk type of audit but can expand into a multi year full blown audit depending upon how it is handled. The most frustrating part of correspondence audit is everytime you correspond with the audit unit you are getting a different IRS agent and many of them are not all that interested in resolving the audit issues that have arisen. Many of my clients that have contacted me frustrated with the correspondence audit process have written multiple letters to the IRS over a 6 to 9 month period and have felt like their correspondence was ignored or misinterpreted.
All too often these audits end in the IRS sending a 90 day letter out in which the taxpayer has 90 days to file a tax court petition to challenge the IRS’s assessment of additional tax penalties and interest on all too often the wrong facts or the wrong law. Ultimately you may be forced to file a tax court petition to get your first real opportunity to speak face to face with a human in order to resolve your audit issues. Filing a tax court petition will get your case bumped into the IRS appeals process where you can request a face to face meeting with an IRS appeals officer or better yet, let your tax counsel resolve the issue for you. The IRS has a 98% settlement rate on litigation without the need to actually appear in tax court. If your counsel cannot settle the issue favorably in appeals they can often do so on the courthouse steps with the IRS Chief Counsel’s Office.
IRS Office Audit
Another type of audit is the IRS office audit. These often involve in-person interviews and is a much more extensive process, where the IRS is ordinarily seeking quite a bit of information. Depending on the results of a correspondence audit by mail, it could evolve into an IRS Office Audit and an interview. Having a Tax Attorney to be at your side during an interview (or better yet – handling the interview for you entirely, or involved in your correspondence audit is invaluable to help rectify the situation. Audits are always about money. However, audits get incredibly stressful when they become about the risk of civil fraud penalties or the risk of criminal tax prosecution if the IRS determines that badges of fraud exist in your audit fact pattern. 70% of communication is non verbal and lying to a federal agent is a felony in and of itself. If you know for a fact you cheated on the returns under audit, the original preparer is the absolute worst choice you could make for a representative in your audit. If the IRS believes you cheated on the return at issue the original prepare could face conspiracy charges or aiding and abetting income tax evasion charges if the IRS believes they willingly assisted you in cheating. This creates a conflict of interest where the original preparer may bury you in an attempt to mitigate their own exposure.
IRS Field Audit
The highest risk type of audit is an IRS field audit. In this type of audit, IRS agents will attempt to interview you in your home or place of business. They will often be attempting to assess your standard of living if they visit your home. Your furnishings, house, neighborhood, cars, apparel, art, landscaping etc. all provide an indication of the type of income you are used to living off of. If you live in an ocean front property, drive a maserati, own a yacht or an airplane, dine at expensive restaurants and constantly show losses on your tax returns you are at risk of being hit with civil fraud charges or prosecuted for income tax evasion if you cannot prove where your disposable income is coming from.
If they visit your business they are often attempting to identify areas on your tax returns likely to contain misstatements. They will be asking about income you receive and expenses you pay in cash. They will be asking about how your business functions and how many employees you have and they will often want to reconcile between your depreciation schedules and the equipment located at your business. They will be on the lookout for personal assets being claimed as depreciable business assets. They will want to be able to lay their hands on every type of business document imaginable. They will be very interested in your accounting system and point of sale system.
If you are facing a Field audit, you would be wise to hire representation to handle the audit, business tour and client interview for you.
How Far Back in Time Can an IRS Audit Go Back?
Answer: 3 years in most cases, 6+ years in extreme cases.
If the Internal Revenue Service (IRS) detects an error or discrepancy on a taxpayer’s tax return, or if the taxpayer fails to file one or more tax returns, the IRS is likely to initiate an audit, or examination of the taxpayer’s records and financial transactions. Depending on the results of the audit and whether the taxpayer appeals, the IRS may impose various penalties, or even refer the matter to prosecutors within the Department of Justice. However, there are certain limitations to the IRS’ auditing powers. For example, a time limit known as the “statute of limitations” restricts the amount of time in which the IRS may initiate an audit after the filing, or due date, of a tax return, though some exceptions apply. With tax returns due April 17 this year, the IRS is poised to launch a wave of audits of taxpayers who make filing errors. Therefore, it is prudent for at-risk taxpayers to understand some basic information about the statute of limitations on IRS audits.
What are the Time Limits for an IRS Audit, and Are There Exceptions?
In most cases, the statute of limitations grants the IRS a period of up to three years in which to initiate an audit of a taxpayer. The three-year clock begins counting down from the latter of the following dates:
The Date on Which the Return Was Originally Due
In most years, the federal tax deadline is April 15. However, in certain years, the due date may change to a different date.
The Date on Which the Return Was Originally Filed
If the taxpayer obtained a filing extension, which may be done by filing Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return), the filing date may have been up to six months later than the original due date without the return being considered delinquent and without incurring failure-to-file penalties.
Though the three-year statute of limitations applies in many cases, there are also a few exceptions which may affect certain taxpayers. In other words, there are some tax situations where the statute of limitations is extended, granting the IRS additional time to audit taxpayers who meet certain criteria. For taxpayers who meet these criteria, the risk of an audit is heightened.
Some major exceptions to the three-year IRS audit statute of limitations are listed below. If any of these exceptions seem applicable to your situation, you should contact an experienced IRS tax audit attorney immediately for further guidance. If you are chosen to be audited, it is essential to begin developing a strategy as soon as possible.
How Many Times Can the IRS Audit You?
Whether you are dealing with a correspondence, office, or field audit, no taxpayer ever wants to be the subject of multiple IRS audits. Unfortunately, the tax code allows the IRS to conduct an audit against a taxpayer multiple times within certain limits.
The IRS policy for repetitive audit procedures is that they apply to individual tax returns that do not attach a Schedule C or Schedule F and the examination of the following factors:
- A review of the two previous tax years showed that there was no change or a small tax change, whether it was a deficiency or overassessment.
- The problems addressed by the IRS in the prior two tax years are practically identical to the issues present in the current tax year.
When a taxpayer shows that there was not much of a change between tax audits across multiple years, they may be able to argue that the IRS should terminate a repetitive audit. On the contrary, if a taxpayer makes several new mistakes that drastically affect their tax liability, this could result in another tax audit for separate reasons. This means that a taxpayer could theoretically be subject to a tax audit for every year when they unknowingly or intentionally make a tax error.
Our legal team could help you communicate with the IRS to negotiate whether you should be subjected to multiple audits. With an IRS tax audit comes the possibility of heavy penalties that could be assessed to an individual or their business. We want to minimize the possibility of having to pay a large tax debt due to avoidable errors.
The bottom line here is that if the IRS, or state taxing authority, hits pay dirt and finds that you did not comply with tax law every time they audit and consequently you owe additional tax, penalties, and interest after every tax audit, they can audit you indefinitely. The solution is to file bullet proof returns that the taxing authorities do not come up with additional tax penalties interest and they will eventually lose interest.
Tips to Avoid an IRS Audit
One of the best ways to deal with a potential future tax audit is to take precautions that will limit the likelihood that the IRS will select you for an audit each time you file returns on a go forward basis. There are several steps you could take to avoid an IRS audit. For instance, you always want to ensure that the income information you provide to the IRS is identical to what is listed on your W-2 Forms or 1099s. You should also consider the following tips:
- Avoid claiming excessive deductions that raise red flags in statistical comparison with your reported income level or that you simply cannot substantiate.
- Avoid operating a cash-intensive company and consistently reporting low profits or worse yet, a significant net loss on a Schedule C.
- Keep your charitable non-cash donations under $500 and avoid making donations that are disproportionate to your income level – meet all required substantiation requirements.
- Do not operate your business at a loss for a substantial number of consecutive years if you could help it.
- Do not take excessive tax deductions for meal and entertainment, automobile, travel, and other expenses that you need to operate your business.
One of the most important steps to avoid an IRS audit is to work with a well-versed dually licensed Tax Attorney and CPA that understands the common triggers that could lead to an audit. We will thoroughly examine your tax returns to correct any errors that may result in an audit.
Contact the Tax Law Offices of David W. Klasing if the IRS Audit Statute Clock is Making You Nervous
When an examiner slides Form 872 across the table—or threatens to dig back six, eight, or unlimited years—the statute of limitations becomes your most powerful bargaining chip. At the tax law offices of David W. Klasing, our dual-licensed Tax Attorney-CPAs know how to wield it. We start every engagement by building a real-time statute chart, then run a rigorous risk-reward analysis: How strong are your records? Could more time expose fraud allegations? Would Appeals or Tax Court yield a better result than a rushed notice of deficiency? If a brief extension works in your favor, we draft a narrow, time-boxed consent with hard internal milestones so the extra months advance your agenda, not the government’s. If letting the clock expire is smarter, we tighten IDR responses, index every exhibit, escrow potential tax, and pre-draft a protest—pressure that often nudges the IRS into a modest, last-minute settlement or even a no-change closure.
From day one, we act as statute sentries, integrating deadline alerts into every litigation task, timing settlement overtures for maximum leverage, and refusing any open-ended extension that might turn a civil exam into a fishing expedition. Put simply, we turn the IRS’s ticking clock into your most potent defense weapon. If you’ve received an audit notice, are being pressed to sign Form 872, or want to bullet-proof future filings, call the Tax Law Offices of David W. Klasing at (800) 681-1295 or schedule a confidential, reduced-rate initial consultation online today. In our first meeting we’ll map your statute timeline and craft a strategy that uses every second to protect your net worth—and your peace of mind.
