In 2019, the IRS received around 155 million individual tax returns. About 771,095 taxpayers got pegged for audit. While that shows slightly less than half a percent of a chance to be audited, it isn’t zero.
Just the word "audit" tends to make people shiver. For some groups, the chance of being audited is higher. For some who embraced potentially shady tax practices, the chance the IRS will come after them is higher than even.
Still… how far back can the IRS go when auditing an individual’s tax situation? It turns out that, depending on circumstances, the agency can look back three years, six years, or indefinitely — all the way back to the beginning of your history as a taxpayer.
Read on for details that can help you determine which of those buckets you might land in.
Why Does the IRS Decide to Audit?
Each year, a certain percentage of tax returns are flagged for audit by one of the IRS's automated systems. For example, the Automated Underreporter system spits out returns that show the filer didn't report all the expected income.
Automated systems speed up work on tax returns, which is great if you’re expecting a refund. Unfortunately, if the system finds a discrepancy while comparing your return to existing data provided by the same entities that send you copies of your tax forms, it flags your return for further attention.
Depending on the findings of a closer examination, the IRS may decide to dig deeper with an audit. The IRS also uses automation to find potential unreported taxes and mark non-filers for possible action.
As we mentioned, some taxpayers have a higher chance of being audited, including:
- Taxpayers in higher income tax brackets
- Taxpayers earning far more or less than previous years
- Taxpayers with too many or too few deductions
- Taxpayers deducting a home office without keeping the space exclusively for business
- Taxpayers who make clerical errors
- Taxpayers who misrepresent real estate or asset value
- Tax returns missing forms
The IRS understands that math isn’t everyone’s strong suit, but major math issues can also increase audit probability. For example, rounding up all your gains and losses to the closest tens or hundreds can set off an alert. So can using numbers that all end in zero or five.
Does Math Make You Panic?
What if you forgot a decimal point or made another math mistake? Too bad. The IRS will find it. The IRS has the authority to correct your return. You have the right to protest the correction if you can provide evidence that the original math is correct. It still means becoming more visible to the IRS than most people like.
This is where audits can work in your favor. You might receive an audit that says, “No change.” That means, as far as the IRS is concerned, you don’t owe any money, forms, or anything else. Even better, although it happens rarely, the IRS may find an error in your favor, and you get an unexpected refund. Woohoo!
Statute of Limitations on Collections
The IRS has 10 years to collect on your tax liability, whether you filed everything correctly or not. If you want a better outcome from the collection or audit process, keep the following where you can easily find it:
- All tax records, electronic and hard copies
- Proof of when your return was filed or mailed
- Receipts relating to your assets
If you haven’t paid taxes or have underpaid in the past, you may as well keep these documents for the full 10 years in case the IRS comes calling.
Federal Tax Statute of Limitations
First, it's important to understand the difference between civil and criminal tax fraud or evasion. The IRS and the Federal government is limited in auditing for civil tax fraud. The agency must have overwhelming evidence of fraud. Even so, you only receive financial penalties, no jail time. However, the audit can go back indefinitely.
A criminal tax investigation is different from an audit. The IRS refers the matter to special agents in the criminal division who are limited by a statute of limitations based on the severity and scope of the fraud. Criminal tax investigations can result in financial penalties and prison.
Most audits only go back three years, and the time is counted from the due date for the tax year. For example, if your 2016 return was due in April 2017, the IRS can choose to audit back to April 2014. In fact, most audits only go back two years.
If you never file a return or file late, the three-year limitation still runs from the Federal due date, not the filing date. If you file for an extension, the limitation runs three years from the later filing deadline, typically six months.
The IRS may choose to go back six years, even with no evidence of fraud or criminal activity. If they do extend the audit, it’s because they found significant amounts of unreported income, unreported foreign income, or embellished deductions.
For understating income, an audit is usually triggered at 25% or more of your gross income. You may be audited if you make basis overstatements, too, where the IRS finds that certain basis items on a return create the same result as an income understatement.
Foreign income from investments, gifts, inheritances, and other assets must be declared on your return. If you make sure to complete and submit the correct forms for all this stuff with your return, it’s less likely the IRS will audit. Even with the right forms, the agency could decide to check the six previous tax years for compliance.
No Time Limit
What could anyone ever do to earn an audit of every part of their tax history? Well…
- Never file a tax return
- Omit forms and/or receive unreported gifts of other income from a foreign national
- Commit fraud or tax evasion
Anytime you receive income from anywhere, within the US or from a foreign country, and you don’t report it, the IRS can find out. Not only will you be audited to within an inch of your life, but you could also be charged with criminal activity. Criminal tax evasion or fraud can include up to three years in prison and/or up to $100,000 in fines.
The IRS can audit your tax returns for the past three years, six years, or from forever ago, depending on the information (or lack thereof) that caught their attention. Meanwhile, most people’s chances of being audited are extremely low. If you file your taxes regularly, pay them, and take care to include all required forms, you are probably not going to be flagged.
If you receive an audit letter from the IRS, don’t panic. Contact Top Tax Defenders. We can help.