Understanding IRS Audit Statutes of Limitations

The Internal Revenue Service (IRS) has specific statutes of limitations for conducting audits on individual tax returns. Knowing these can help you understand your potential exposure and what actions to take.

Normal Return Audits: Three Years for Most

For the majority of taxpayers, the IRS can only audit returns from the past three years. For most of us, that only leaves us with three potential years open for audit, unless special circumstances apply.

Substantial Understatement or Taxable Income Audits: Six Years

In cases where there is a substantial understatement in the return or taxable income, the statute of limitations is extended to six years. The clock starts ticking when the return is filed, or when the underreported income is identified.

Complicating Factors: Delinquent and Fraudulent Returns

If you file a delinquent return, the statute starts counting from the date the IRS is deemed to have received the tax return. This can complicate matters, especially if all returns are filed on the same date.

The audit period can further extend in the case of fraud or unfiled returns. In fraud cases, the statute does not begin to run until the fraud is discovered. For unre-filed returns, the IRS can go back as far as it wishes, with no expiration date.

Documentation and Timeframes

For a typical audit, the IRS will review the last three to seven years of returns. The statute of limitations for audits is based on the possibility of fraud; if fraud is suspected, the IRS can audit returns from the taxpayer's birth year (or 1913) until the present.

Consequences of Omitted Income

If income is omitted that represents more than 25% of the gross income reported, the statute of limitations can extend to six years. Otherwise, for typical returns, the IRS can only audit the last three years.

State Audits: Variations by State

Each state that requires the filing of income tax returns has its own statute of limitations, which may differ from the IRS. It is important to be aware that any changes resulting from an IRS audit may also be reported to the state's tax authority based on the address provided on the federal return.

Resolving IRS Audits

Typically, tax audits proceed slowly, following the steps of review and correspondence with the taxpayer. Once the audit is complete, if there are any changes to the tax return, the IRS will report these to the relevant state tax authority.

Understanding the IRS audit statutes of limitations can help you take appropriate actions and avoid potential complications. Always consult a tax professional or attorney for advice specific to your situation.