How Far Back Does an IRS Tax Audit Go?

An IRS tax audit involves an examination of an individual’s or organization’s financial records and tax returns. The Internal Revenue Service (IRS) conducts these reviews to ensure the accuracy of reported information, verify compliance with tax laws, and confirm taxpayers have paid the appropriate amount of tax.

Standard Audit Period

The Internal Revenue Service has a specific timeframe, known as the statute of limitations, within which it can assess additional tax. For most tax returns, this period is three years from the date the return was filed. This three-year rule is established under Internal Revenue Code Section 6501.

The three-year period typically begins on the later of two dates: either the date the tax return was actually filed or the original due date of the return, excluding extensions. For instance, if a 2024 tax return was due on April 15, 2025, but filed late on June 1, 2025, without an extension, the period would begin on June 1, 2025.

Situations Extending the Audit Period

While a three-year window is the general rule for IRS audits, several specific circumstances can extend this period significantly, sometimes indefinitely. These exceptions are outlined in tax law to address situations where there may be a greater risk of tax non-compliance.

Substantial Omission of Income

One common extension occurs when there is a substantial omission of income. If a taxpayer omits an amount of gross income that is more than 25% of the gross income reported on the return, the IRS generally has six years to assess additional tax. This rule is specified under Internal Revenue Code Section 6501. An amount is not considered omitted if it is disclosed in the return or an attached statement in a way that adequately informs the IRS of its nature and amount.

Unfiled or Fraudulent Returns

The statute of limitations does not apply at all if a required tax return is never filed. In such cases, the IRS can assess tax at any time. Similarly, if a taxpayer files a false or fraudulent return with the intent to evade tax, there is also no statute of limitations.

Voluntary Extension

Taxpayers can also voluntarily agree to extend the statute of limitations. This is often done by signing Form 872, Consent to Extend the Time to Assess Tax, which provides the IRS with more time to complete an audit or resolve an issue. The IRS is required to inform the taxpayer of their right to refuse or limit such an extension. Other, less common scenarios can also extend the audit period, such as certain non-disclosures related to foreign financial assets, where the period can extend to six years or more.

Common Audit Triggers

The IRS uses various methods to select tax returns for examination, and while some are chosen randomly, others are flagged due to certain characteristics or discrepancies.

Information Mismatches

One frequent trigger is a mismatch between information reported on a taxpayer’s return and data received by the IRS from third parties. This includes discrepancies with W-2 forms from employers, 1099 forms reporting various types of income (like interest, dividends, or independent contractor payments), and other information statements. When the amounts reported by a third party do not align with what the taxpayer has claimed, it can prompt an audit.

Disproportionate Deductions or Credits

Unusually large deductions or credits, especially when they appear disproportionate to a taxpayer’s income level, can also draw IRS attention. For example, claiming significant business losses repeatedly, particularly for activities that may resemble hobbies rather than legitimate businesses, can raise questions. High-income individuals often face increased scrutiny due to the complexity of their financial situations and potentially larger tax implications.

Other Factors

Other factors that might increase the likelihood of an audit include extensive use of cash for transactions, which can be harder to track, or simple math errors on the return. While these common indicators can lead to an audit, their presence does not automatically imply wrongdoing. They serve as signals for the IRS to take a closer look at a return, regardless of how far back the audit period might ultimately extend.

Record Keeping for Audits

Maintaining accurate and organized financial records is a fundamental aspect of tax compliance and is crucial in the event of an IRS audit. These records provide the necessary evidence to support the income, deductions, and credits reported on a tax return. Without proper documentation, the IRS may disallow claimed deductions or assess additional taxes, penalties, and interest.

It is generally advisable to keep all tax records for at least three years from the date you filed your original return or two years from the date you paid the tax, whichever is later. However, if any of the extended audit situations, such as a substantial omission of income, might apply, it is prudent to retain records for six years. In cases where no return was filed or a fraudulent return was submitted, records should be kept indefinitely due to the absence of a statute of limitations.

Essential documents to retain include receipts, invoices, canceled checks, bank and credit card statements, and W-2 and 1099 forms. Copies of filed tax returns are also important to keep. Organized record-keeping can simplify the audit process, reduce stress, and help ensure that you can substantiate all claims made on your tax return.