Concerns about whether you left money on the table, left something out, or made an error that would trigger an IRS audit can make filing taxes stressful. If you’re concerned that you made an error on an old tax return, you may wonder how far back the IRS can audit.
The IRS has a strict statute of limitations of three years from the day the tax return was due or when it was filed (whichever is later). In 2022, about 0.38% of all tax returns from individuals were audited. This is 626,284 returns out of the 164.5 million filed.
Are there exceptions to the IRS audit statute of limitations?
The U.S. has a voluntary tax system. You voluntarily report your financial information and pay taxes based on the information you provide to the IRS. The IRS typically has three years to go back and determine whether the information you provided is correct. Sometimes, this is extended to six years.
The IRS uses formulas to evaluate taxpayer forms. They compare the income and expenses you report to the returns of other people in similar professions. The IRS receives copies of your W-2s and 1099s. If there is a discrepancy between the income on these forms and your tax return, you are more likely to be audited. They also analyze other numbers, such as your investments.
Under normal circumstances, the IRS statute of limitations is three years. However, there are exceptions to this rule.
The IRS statute of limitations increases to six years to audit a return if the taxpayer under-reports their income by more than 25% or fails to report more than $5,000 of foreign income. This rule applies even if a taxpayer discloses the foreign account on their tax return.
If you omit Form 3520 for gifts or inheritance from foreign nationals, Form 8938 for overseas assets, or Form 5471 if you own part of a foreign corporation, the IRS can audit your return at any time.
If the taxpayer files a false or fraudulent return, the statute of limitations remains open indefinitely. If a taxpayer never files a tax return, there is no statute of limitations, and the IRS can audit the taxpayer at any time.
Can the IRS extend the statute of limitations for an audit?
The IRS may contact you before the three-year deadline, asking you to extend the statute so they can more thoroughly evaluate your tax return. While it can be tempting to deny this request, it is typically not a good idea to do so. If you decline this request, the auditor will need to make their ruling based on whatever information they have on hand.
If you grant the IRS additional time, you have time to gather further documentation, meet with a tax expert, and request an appeal or a refund.
How should you prepare for an IRS audit?
A typical IRS audit can take weeks for more straightforward tax returns to a year or longer. If you are selected for an audit, you or your tax representative will meet with the IRS agent to review your tax return. It is a good idea to have records such as bills, receipts, loan agreements, legal papers, tax documents, and foreign income documents on hand for easy reference. The IRS agent may ask for additional documentation.
After the audit, you will either agree with the audit results, disagree with the audit results, or there are no changes requested.
- If you agree with the audit results, you will be asked to sign the report and pay additional tax payments.
- If you disagree with the audit results, you can request a meeting with the IRS manager or take the matter to court. If your audit reaches this point, it is a good idea to consult with a tax professional.
Anyone can be audited, but you can reduce your risk by ensuring your tax return is accurate and as free from error as possible. Consult with a tax professional to understand your tax obligations, especially if you have foreign accounts, numerous potential deductions and charitable donations, excessive business expenses, or multiple streams of income.
A fee-only financial planning professional can meet with you and discuss your financial goals and objectives. They can help you develop a financial plan that maximizes your tax deductions while staying within the IRS guidelines.
There is no one-size-fits-all guide to investment. Working with a wealth manager can ensure you make the best financial decisions for yourself and your loved ones.
