Many Americans fear having the IRS conduct an audit on their tax returns. Filing your tax return on time doesn’t mean that you are safe from an IRS audit – or safe from the IRS coming after you. In fact, the IRS can look into your return long after you filed it.
While it’s important to get your return in by the federal due date, the truth is that no taxpayer in the United States is completely immune from an IRS audit – regardless of whether you’re randomly selected for an audit or have more serious tax issues, such as making mistakes on a tax return (or worse).
If your tax return does raise red flags with the IRS, you might be in hot water. Every taxpayer must report all of their taxable income – as well as pay the taxes that come with it. If you purposely fail to do so, you can be fined or even face jail time.
So, how far back can the IRS audit you?
Usually, there is a time limit on how long the IRS has to collect back taxes that you owe. The federal statute of limitations usually runs for three years. However, these audit periods can be extended by up to six years or even to no time limit at all.
1. The Three-Year Audit
Based on the federal statute of limitations, the IRS can carry out an audit typically up to three years after you file your tax return.
This means that if you filed your federal tax return on the federal due date of April 15 for example, the IRS can audit this return up until April 15 three years later.
A few points to keep in mind about due dates:
- If you file early (before April 15), the statute of limitations still runs three years after the federal due date – and not the tax filing date.
- If you apply for and receive an extension on your tax return from the IRS, the statute of limitations will run from the new filing date – which can be six months after the original due date.
- If you filed late and did not have a filing extension, the statute of limitations starts running three years from the late filing date.
While the IRS usually only has up to three years to collect back taxes owed, there are some exceptions. In these cases an IRS tax audit can be conducted up to six years after the filing date – or longer.
2. The Six-Year Audit
Extending the statute doesn’t happen often, but it does occur. The IRS has up to six years to conduct an audit on back taxes that you owe, in the following circumstances:
- Understating Income: Your tax return indicates a significant understatement of income – this typically means an understatement of 25%+ of your gross income.
- Basis Overstatements: The IRS determines that certain items on your tax return have the same result as a 25%+ understatement of your gross income.
For example, you sell your house for $6.5 million dollars and claim that you originally invested half of that amount, $3.25 million dollars in the property. In reality, you only invested $2M in that property (your basis). The result of your basis overstatement is that you only pay taxes on $3.25 million dollars of profit gain – when you should have paid taxes on $4.5 million.
- Foreign Income (including gifts and assets): The IRS can conduct an audit up to six years after you file your tax return if you omit $5000 or more of foreign income from your return. This also includes inheritances and interest in overseas or offshore accounts.
Additionally, the IRS has a number of forms that need to be filled out which are related to foreign income, gifts, assets, and inheritances. If they are not filled out, the statute will be extended.
Having the statute of limitations extended on your tax return by an additional three years is far from ideal, but there is an even worse situation that you can be in.
3. No Time Limit Audit
In very exceptional circumstances, there will be no time limit on how far back the IRS can collect back taxes owed – meaning that the statute of limitations will not be applicable. This is a situation every taxpayer wants to avoid at all costs.
In the following circumstances, no statute of limitations may apply:
- If you do not file a tax return at all. Moreover, if you file a return but don’t sign it, no statute of limitations may apply, since it would not be considered a valid tax return by the IRS.
- If you file a fraudulent return. This includes tax evasion by not fully reporting your income, using a fake Social Security number, falsely claiming deductions, or claiming your business expenses as personal expenses.
This is a serious felony violation. A taxpayer who files a fraudulent tax return can be imprisoned for up to three years, fined up to $100,000 – or both.
How Many Years Does The IRS Have To Collect?
After your tax liability is assessed, the IRS has 10 years to collect – this is the Collection Statute Expiration Date (CSED).
There have been cases where the collection statute has been renewed for well beyond 10 years, so it is important that you keep the following items on hand:
- All of your tax records (both electronic and hard copies)
- Proof of when your return was mailed or filed
- Pertinent receipts as they relate to the basis in assets
Proper record-keeping can help you resolve your IRS dispute, as well as reach a better outcome for your case.
Why You Should Work With a Polston Tax Attorney
Being audited by the IRS can be scary, especially if you don’t know tax law.
You deserve to have your tax rights protected. Speak with a Polston Tax Attorney who will provide tax advice and protect you from potentially having thousands of additional tax dollars added to your tax liability. When you partner with Polston Tax, you will be fully supported by a seasoned tax professional with years of tax industry experience.
Licensed to practice in all 50 states as tax attorneys, we have over 100 tax professionals on staff from all areas of the tax industry – tax lawyers, IRS enrolled agents, case managers, accountants, and CPA’s – so we are more than well-equipped to handle your tax matters and provide you with the help you need, all under one roof.
Contact us today to get your life back in order and resolve your tax problems for good.