How Far Back Can the IRS Audit You?

Understanding how far back the IRS can audit you is essential for ensuring your tax filings are accurate and compliant. While the standard statute of limitations for IRS audits is three years, certain situations can extend this period to six years—or even indefinitely.

How Far Back Can the IRS Audit You?

The IRS usually follows the following statutes in regard to audits:

The 3-Year Standard Statute

The IRS generally has three years from the date you file your tax return to initiate an audit. For example, if you filed your 2021 tax return on April 15, 2022, the IRS would have until April 15, 2025, to audit that return. This is the most common timeframe for IRS audits.

The 6-Year Extended Statute

The audit timeline can extend to six years in cases involving significant discrepancies, such as

Substantial Underreporting: If you fail to report more than 25% of your gross income
Undisclosed Foreign Income: If you have offshore accounts or foreign assets and fail to file the required forms (e.g., Form 8938).
Overstated Deductions: If you inflate deductions significantly beyond allowable limits.

Unlimited Audit Period

In certain scenarios, the IRS is not bound by a statute of limitations and can audit you indefinitely:\n

Failure to File: If you haven’t filed a tax return, the statute of limitations doesn’t begin until the return is submitted.
Fraudulent Activity: If the IRS suspects civil tax fraud or intentional evasion, there is no time limit on audits.
Passive Foreign Investment Companies: Failure to file Form 8621 for investments in foreign mutual funds and other passive investments allows the IRS to audit indefinitely.

How Often Can the IRS Audit You?

There’s no limit to the number of audits you can face over your lifetime. However, some factors can increase the likelihood of multiple audits:\n

Self-Employment: The IRS closely monitors self-employed individuals for income misreporting and improper deductions.
Recurring Issues: If you’ve been audited previously for the same issue and received a “no change” letter, the IRS is less likely to audit you again on the same grounds.
Outstanding Liabilities: Taxpayers with unpaid tax debts or judgments may face additional scrutiny.

Audit Types and Their Implications

Not all IRS audits are the same. Here are the different types of IRS audits and the corresponding consequences:

Simple Audits

Focus on clarifying minor issues, such as income discrepancies or documentation for deductions.
Often resolved quickly with minimal consequences, such as small fines or penalties.

Eggshell Audits

Occur when you knowingly underreported income or failed to disclose information.
Requires careful handling to avoid self-incrimination or further legal action.

Reverse Eggshell Audits

The IRS has incriminating information but hasn’t disclosed it to the taxpayer.
In these situations, full transparency and legal guidance are essential.

Reducing the Risk of an IRS Audit

While audit odds are generally low, they increase as your income rises or if you operate a business. Follow these strategies to minimize your risk:

File all required returns accurately and on time.
Keep detailed records of income, expenses, and deductions.
Avoid claiming excessive or unsupported deductions.
Report foreign assets and income as required.
Work with a tax professional to ensure compliance.

5 Reasons Why the IRS Audits Tax Returns

The IRS uses audits to verify the accuracy of tax returns and ensure compliance. Here are common reasons your return might be selected for an audit:

1. Random Selection

The IRS randomly selects returns based on a statistical formula to ensure widespread compliance.

2. High Discrepancy Scores

The IRS’s Discriminant Information Function (DIF) system flags returns with significant discrepancies between reported income and typical deductions.

3. Unreported Income

Failing to report income from freelance work, side jobs, or foreign sources increases audit risk.

4. Claiming Excessive Deductions

Unusually high deductions, such as charitable contributions or business expenses, can trigger an audit.

5. Prior-Year Liabilities

If you owe taxes from previous years, the IRS may scrutinize your future filings more closely.

IRS Audit Triggers to Avoid

Certain actions or errors can make your return more likely to be audited. To minimize risk, avoid these common audit triggers:

1. Failing to Report All Income

The IRS receives copies of your W-2s, 1099s, and other income documents. Ensure your reported income matches these records.

2. Large, Unusual Deductions

While deductions for business expenses or charitable contributions are allowed, they should align with your income level and industry norms.

3. Math Errors

Even small calculation errors can result in additional scrutiny.

4. Missing Forms or Documentation

Failing to include required forms, such as Schedule C for self-employed income, can raise red flags.

What Happens During an IRS Audit?

If the IRS selects your return for an audit, the process typically unfolds in several stages:

Notification

The IRS will notify you by mail, never by phone or email.
The notice will specify which items on your return are under review.

Document Request

The IRS will request supporting documents, such as receipts, bank statements, or income records.
In some cases, the audit may be conducted entirely by correspondence.

In-Person Audits

For more complex audits, the IRS may conduct in-person reviews at your home, business, or a local IRS office.

Resolution

After reviewing your documentation, the IRS will propose adjustments or close the audit with no changes.

3 Additional Types of IRS Audits

There are several types of IRS audits, each varying in complexity:

1. Correspondence Audits

Conducted via mail and typically involves minor issues, such as verifying income or deductions.

2. Office Audits

Require you to meet with an IRS agent at a local office to review specific items on your return.

3. Field Audits

The most comprehensive type is conducted at your home or business to examine multiple aspects of your finances.

How to Prepare for an IRS Audit

Preparing for an audit is essential to ensuring a smooth process and minimizing potential penalties. Follow these steps:

1. Gather Documentation

Collect all relevant documents, such as receipts, bank statements, and prior-year tax returns.

2. Review Your Return

Check for any discrepancies or errors in the areas under audit.

3. Consult a Professional

A tax professional or CPA can help you navigate the audit and ensure compliance with IRS regulations.

How Long Does an IRS Audit Take?

The duration of an audit depends on its complexity and the responsiveness of the taxpayer. Here are general timelines:

Simple Audits

Correspondence audits are usually resolved within 3 to 6 months.

Complex Audits

Office and field audits can take 6 months to a year or longer, depending on the scope of the review.

Consequences of an IRS Audit

An audit doesn’t always mean you’ll owe more taxes. Possible outcomes include:

No Change

The IRS agrees with your return, and no adjustments are made.

Proposed Adjustments

The IRS may propose additional taxes, penalties, or interest.

Taxpayer Refund

In rare cases, the audit may uncover overpayments, resulting in a refund.

Tips to Reduce Audit Risk

To lower your chances of being audited, follow these best practices:

1. File Accurate Returns

Double-check your return for errors or omissions before filing.

2. Report All Income

Include income from all sources, even small side jobs.

3. Keep Records Organized

Maintain organized records of income, expenses, and deductions for at least seven years.

4. Work with a CPA

A professional can ensure your return is accurate and compliant, reducing the risk of audit triggers.

How Dimov Tax Can Help

At Dimov Tax, we specialize in helping individuals and businesses navigate the complexities of IRS audits. Whether you’re preparing for an audit, need assistance with back taxes, or want to ensure your filings are compliant, our team of experienced professionals is here to help.

Our Services Include:

Audit preparation and representation.
Filing back taxes to begin the statute of limitations.
Ensuring compliance with foreign asset reporting requirements.
Advising on risk reduction strategies.