How Long Can You Be Audited by the IRS?

An IRS audit involves a review of an individual’s or organization’s financial information and accounts to ensure accuracy and compliance with tax laws. These examinations verify the reported tax amount and do not always indicate a problem, as some audits result from random selection or computer screening. The Internal Revenue Service operates under specific time limits, known as statutes of limitations, which govern how long it has to assess additional tax or initiate collection actions. Understanding these timeframes is important for taxpayers because they define the period during which the IRS can legally examine tax returns and pursue any underpayments.

Standard Timeframes for Audits

The general statute of limitations for the IRS to audit a tax return and assess additional tax is three years. This three-year period typically begins on the later of two dates: the date the tax return was actually filed, or the original due date of the return. For instance, if a tax return for a given year was due on April 15 but was filed early, the three-year clock for an audit still starts on April 15. If a taxpayer files an extension, the statute of limitations begins on the extended due date of the return.

If a taxpayer files a return late without an extension, the three-year window for an audit starts on the date the return was actually filed. In a rare scenario where a taxpayer fails to file a required return, the statute of limitations for assessment does not begin to run at all, leaving the tax year open indefinitely for audit and assessment.

Once a tax has been assessed, a separate statute of limitations applies to the IRS’s ability to collect that tax. Generally, the IRS has ten years from the date the tax was assessed to collect the debt, along with any associated penalties and interest. This period is referred to as the Collection Statute Expiration Date (CSED).

Situations Extending the Audit Period

While a three-year period is standard for IRS audits, specific circumstances can significantly extend this timeframe or eliminate it entirely. These statutory exceptions are defined by law and apply automatically when certain conditions are met.

One common extension occurs when there is a substantial omission of income. If a taxpayer omits more than 25% of their gross income reported on a tax return, the statute of limitations for assessment is extended to six years. Gross income in this context includes all income from whatever source derived, and all omitted income items are combined to determine if the 25% threshold is met.

When a false or fraudulent return is filed with the intent to evade tax, there is no statute of limitations for the IRS to assess additional tax. The IRS bears the burden of proving fraud by clear and convincing evidence.

Similarly, if a taxpayer fails to file a required tax return, the statute of limitations for assessment does not begin to run. Although the IRS technically has unlimited time, in practice, it usually focuses on assessing and collecting taxes for the past six years of unfiled returns, unless there are indications of fraud or significant tax liability.

Foreign financial assets can also impact the audit period. For instance, if a taxpayer omits more than $5,000 of income from foreign sources, the IRS may have six years to audit. Failure to file certain required international information returns, such as Form 8938 or FinCEN Form 114, can result in extended or indefinite assessment periods for related income or penalties.

Carrybacks, such as net operating losses, can also affect the statute of limitations for prior tax years. When a carryback is applied, it can effectively reopen the assessment period for the year to which the loss is carried. This allows the IRS to examine the accuracy of the carryback amount and its impact on the tax liability of the earlier year.

Agreements to Extend the Audit Period

Taxpayers and the IRS can mutually agree to extend the statute of limitations for assessment. This voluntary agreement is typically documented using Form 872, “Consent to Extend the Time to Assess Tax.” The form specifies the kind of tax, the period ending, and the new expiration date for assessment.

The IRS often requests an extension for several reasons. These include complex audit issues that require more time for examination, awaiting information from third parties, or ongoing negotiations with the taxpayer. Extending the period allows the IRS to complete its review without rushing to issue a notice of deficiency before the original deadline expires.

Taxpayers have several choices when presented with a Form 872. They can sign the agreement, which typically extends the period for a specific duration, often for one year. Alternatively, they can refuse to sign, which may prompt the IRS to issue a notice of deficiency based on available information, potentially leading to a Tax Court petition. Taxpayers may also offer a restricted consent, limiting the extension to specific issues or a shorter period.

Signing an extension can be advantageous, as it provides more time for the taxpayer to gather documentation or resolve complex issues without immediate assessment. Refusing to sign, while a taxpayer’s right, can lead to a quicker, potentially less favorable, assessment by the IRS. The decision to sign Form 872 should be carefully considered based on the specific circumstances of the audit.

What Happens When the Audit Period Ends

Once the statute of limitations for assessment expires, the IRS generally loses its legal authority to assess additional tax for that specific tax period. The expiration provides a sense of finality for taxpayers regarding their tax liability for that period.

However, the expiration of the assessment period does not affect previously assessed taxes. If the IRS assessed a tax liability before the statute expired, it typically has ten years from the assessment date to collect that tax. This collection period, known as the Collection Statute Expiration Date (CSED), can be suspended or extended under specific circumstances, such as during bankruptcy proceedings, an offer in compromise, or when a taxpayer is outside the United States.

There are rare exceptions where a tax year might effectively be reopened or where previously assessed tax can still be collected. For instance, if civil fraud is discovered after the assessment statute has run, but an assessment was made, the IRS may still pursue collection.