The IRS Look Back Rule: How Long Can the IRS Audit You?

The Internal Revenue Service (IRS) has a limited time to examine a taxpayer’s return and assess additional tax. This timeframe, formally known as the statute of limitations on assessment, is often referred to as the “look-back rule.” It provides finality for taxpayers, ensuring that the possibility of an audit for a specific tax year does not extend indefinitely. After this period, the IRS is generally barred from questioning the information on a return. The look-back rule balances the government’s need to enforce tax laws with a taxpayer’s need for certainty, and understanding its details is a component of effective financial management.

The General Three-Year Look-Back Period

For most tax returns, the IRS has a three-year window to initiate an audit and assess additional tax. This standard period, established under 26 U.S.C. § 6501, applies to individuals, corporations, and other business entities. Once three years pass without the IRS proposing changes, the tax year is considered closed for audit purposes.

The countdown for this three-year period begins on the later of two dates: the date the tax return was filed or the original due date for that return. This rule prevents a taxpayer from shortening the audit window by filing a return early. For instance, if a return due on April 15 is filed on February 10, the three-year period begins on April 15. If a taxpayer obtains a filing extension and files on October 15, the clock starts on October 15. For a late filing without an extension, the period begins on the date the IRS receives the return.

Circumstances Extending the Look-Back Period

While the three-year window is standard, certain situations grant the IRS additional time to review a tax return. These circumstances can extend the look-back period to six years or even indefinitely.

• Substantial understatement of income: The period extends to six years if a taxpayer omits gross income that is more than 25% of the income stated on the return. For example, reporting $100,000 of gross income but omitting an additional $30,000 would trigger the six-year statute.
• Filing a fraudulent return: If the IRS proves a taxpayer filed a fraudulent return, there is no time limit on assessing additional tax and penalties. Civil tax fraud involves an intentional act to evade a known tax duty, and an audit for a fraudulent return can happen at any point.
• Failure to file a return: The look-back clock never starts if a return is not filed. This allows the IRS to assess tax for that missing year at any time. This underscores the importance of filing every year, even if you cannot pay the tax owed, as filing initiates the countdown.
• Foreign income and assets: Failing to report over $5,000 of income from foreign financial assets extends the statute to six years. Not filing certain informational returns for foreign assets can keep the statute for the entire tax return open indefinitely until the required form is filed.

Distinguishing the Assessment Period from the Collection Period

The time the IRS has to assess a tax is different from the time it has to collect it. The look-back rule is the Statute of Limitations on Assessment, the timeframe the IRS has to audit a return and determine a tax liability. This is the three or six-year period that begins after a return is filed.

Once the IRS assesses a tax, a separate clock begins for the Statute of Limitations on Collection. The IRS has 10 years from the date of assessment to collect the tax debt, a period governed by a different section of the tax code.

These two statutes do not run at the same time, as the assessment must occur first. For example, if the IRS audits a return two years after it was filed and assesses more tax, the 10-year collection clock starts from that assessment date. This sequential nature means the total time from filing a return to the expiration of collection efforts can be well over a decade.

The end of the assessment period provides certainty that no new tax liabilities can be created for that year. The end of the collection period provides finality that the government can no longer seek payment for a previously assessed debt.

Implications for Tax Record Keeping

The look-back periods determine how long taxpayers should retain their tax records. For a standard return, you should keep a copy of the return and all supporting documents for at least three years after the filing or due date, whichever is later. Supporting documents include W-2s, 1099s, canceled checks, and receipts for any deductions or credits claimed.

Many tax professionals advise keeping records for at least six years. This practice provides a safeguard in case the IRS alleges a substantial understatement of income. This is particularly relevant for individuals with more complex financial situations, such as business owners or investors, where the calculation of gross income may involve more variables.

A different rule applies to property and assets. For items like stocks or real estate, records that establish the property’s basis (the purchase price plus improvements) should be kept for as long as you own the property. After selling the asset and reporting the transaction, you should keep those basis records for the applicable look-back period to prove the asset’s cost and accurately calculate the taxable gain or loss.