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How Far Back Can the IRS Audit?

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How Far Back Can the IRS Audit?

How Many Years Can an IRS Audit Go Back?

How Far Back Can The IRS Audit?: Page Contents at a Glance

 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. 

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.

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 Many Years 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:

      1. 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.
      2. 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.

      • Up to Six Years – The IRS may have up to six years in which to conduct an audit in cases where a tax return indicates a “substantial understatement of income,” which in most cases, means an understatement of approximately 25% or more. Taxpayers must report and pay taxes on taxable income, making the willful failure to report income an offense punishable by fines, restitution, and prison time.
      • No Time Limit – In some situations, no statute of limitations applies, giving the IRS unlimited time in which to conduct an audit. This is a worst-case scenario for any taxpayer, making aggressive legal representation imperative. The IRS may audit taxpayers with no time limit in the following scenarios:
        • The taxpayer does not file a tax return. If a taxpayer is not ready to file by Tax Day, the appropriate response is to obtain a time extension and consult with an experienced tax attorney. A tax professional can help you get caught up on back taxes and delinquent returns while working to manage your failure-to-file penalties.
        • The taxpayer files a fraudulent tax return. Filing a fraudulent tax return is a felony violation of 26 U.S. Code § 7206(1). Taxpayers who commit this offense may be fined up to $100,000 and/or imprisoned for up to three years.
      • 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.

Get Tax Audit Help Today

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If you are concerned about a tax audit, you may be interested in the following for further reading:

IRS Tax Audit Attorneys Offering Reduced-Rate Consultations

While educating yourself is a useful first step, it is critical to discuss your matter with an experienced tax professional – ideally an attorney with a long record of resolving civil audits and defending criminal cases successfully. At the Tax Law Offices of David W. Klasing, our tax team is comprised of criminal tax defense attorneys, employment tax audit attorneys, foreign account audit attorneys, and other accounting and tax professionals, bringing decades of combined legal and financial experience to a wide range of tax issues facing business entities and individual taxpayers.

Whether a tax audit concerns the inaccurate reporting of income, the division of property in a divorce, capital gains realized from Bitcoin and other cryptocurrencies, or the misclassification of employees as independent contractors by a small business owner, our tax firm is ready to approach the matter with enthusiasm and efficiency. For a reduced-rate tax consultation about how we can assist with your audit-related tax matter, contact the Tax Law Offices of David W. Klasing online, or call us today at (800) 681-1295.

Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices in San BernardinoSanta BarbaraPanorama City, and Oxnard! You can find information on all of our offices here.

Here is a link to our practice overview video on warning signs that an audit has gone criminal.

What is an effective tax defense in an IRS eggshell tax audit?

So, you cheated on your taxes and you are under a tax audit…

Why should I hire a tax attorney to represent me in a tax audit?

Foreign income and information non-compliance

Read more about Tax Audits in our FAQ library:

Your Rights During an IRS Audit

What Can I Do to Prepare for an Audit?

Can I Find Out Why the IRS Chose to Audit Me?

How Does the IRS Decide Who to Audit?

Are All IRS Audits the Same?

How to Survive an Audit after Cheating on Your Tax Return

Most Common Audit Techniques

What is an Eggshell Audit?

What is a Reverse Eggshell Audit?

Best Possible Outcomes of an Eggshell Audit

Effective Tax Defense Counsel Goals in an Egg Shell Audit

Why is a Reverse Egg Shell Audit Dangerous to a Taxpayer?

How Should Tax Audits be Handled by a Criminal Tax Counsel?

Warning Signs of a Criminal Referral from an IRS Audit

Why Should You Hire David W. Klasing to Represent You in an Audit?