How Far Back Can the IRS Audit You?
Generally speaking, the Internal Revenue Service (IRS) can audit your tax filings from up to 3 years in the past. However, if there are significant errors in your returns, the IRS can double this limitation and look back up to 6 years. If the IRS decides that there are signs of tax fraud, it can look at every tax filing that you have ever made. Finally, you can agree to extend the amount of time that the IRS can review.
Getting ahead of an IRS audit is essential. Invoking the statute of limitations can reduce how far back the IRS can look, which can drastically reduce the material that the IRS can use against you.
The IRS audit defense lawyers at Oberheiden P.C. have helped individuals and corporations invoke their rights during an IRS audit or investigation, securing favorable results for clients across the country.
Typically, the IRS Can Look Back Through 3 Years of Taxes
When there are no signs of tax fraud or any indications that you have evaded making substantial tax payments, the IRS can only look back 3 years into your filings. Tax statements and returns from earlier than that are off-limits to the agency’s investigators.
This limitation comes from the Internal Revenue Code, codified at 26 U.S.C. § 6501.
Importantly, the date that those 3 years begins to run can vary, depending on whether you filed your taxes on time. They begin on the later of either the:
- Due date for your taxes, or
- Date you actually filed your taxes.
For individuals, taxes are due on April 15th every year. If you file your taxes early, the 3-year look-back period still begins on April 15th, because that is the due date and is the later of the potential dates that starts the 3-year period. If you get an extension to October 15th, then the 3-year period begins on October 15th, even if you file your taxes before the deadline arrives.
However, if you fail to file your taxes on time, then the 3-year look-back period begins on the date that you actually filed your taxes. This prevents people from manipulating the amount of time that the IRS has to initiate an audit and investigate their tax filings.
The IRS claims that it tries to audit a return as soon as it can after it is received. The agency claims that most of its audits are done within 2 years of receipt.
Large Errors Can Let the IRS Look Back 6 Years
Under 26 U.S.C. § 6501(e), if the IRS uncovers evidence of “substantial” errors in a tax return, it will trigger an exception to the normal 3-year statute of limitations and double the amount of time that the IRS can inspect. This gives IRS auditors access to 6 years of your tax returns.
Errors are “substantial” if they omit:
- Over 25 percent from the reported gross income on a return, or
- A reportable foreign financial asset under 26 U.S.C. § 6038D that was worth at least $5,000.
An important thing to note, though, is that there is little stopping IRS agents from looking back at returns over 3 years old and finding “substantial” errors that, albeit only after the fact, allow it to review those documents. This possibility makes it very important to invoke your rights and defend your interests during an IRS audit.
Tax Fraud Lets the IRS Look at Whatever It Wants
There are a few circumstances that throw out the statute of limitations and lets the IRS look at whatever tax filings they want to look at, no matter how long ago they were filed. These circumstances are listed at 26 U.S.C. § 6501(c). Several of them are related to tax fraud, such as:
- Not filing a tax return at all
- Filing a false or fraudulent return, intending to evade paying your taxes
- Any other willful attempt to commit tax evasion
In any of these cases, the IRS can look back as far as it wants into your tax-related history. They can unearth returns that you filed decades in the past and use them against you.
You Can Agree to Extend the Look-Back Period with the IRS
You also have the option of entering into an agreement with the IRS that extends the look-back period. Known as “consent agreements” or just as “consents,” these can be used for anything except for estate taxes.
There are 2 types of consent agreements:
- Open-ended consents, which extend the look-back period indefinitely, and
- Fixed-date consents, which set a new date for the look-back period to end.
Additionally, consent agreements can also be confined to particular courses of conduct. For example, you can enter into a consent agreement with the IRS that is limited to an IRS appeal that is pending but that concerns a tax return that is approaching the applicable look-back limitation.
Entering into a consent agreement with the IRS should only be done if you have legal representation, as it agrees to waive your legal rights of repose. Generally, this will go against your interests, no matter how strongly IRS agents insist that it will not. However, there may be circumstances at play where agreeing to a consent is actually in your interests – such as when you have an IRS appeal challenging the amount of your tax liability, but the look-back period is about to pass by the date of the tax return at issue.
Oberheiden P.C.: Tax Audit Defense Lawyers With Your Interests at Heart
The IRS audit defense lawyers at Oberheiden P.C. make frequent use of the limited ability of the IRS to look into your past for evidence against you. These limitations are put in place to ensure that the evidence is still fresh, that law enforcement does not drag its feet in pursuing legal action, and that you have the opportunity and ability to repose in the knowledge that a tax return from long ago will not be used against you.
Oberheiden P.C.’s tax defense attorneys represent companies and individuals across the country. Call our national law firm at (888) 680-1745 or contact us online to get started on your case.
Dr. Nick Oberheiden, founder of Oberheiden P.C., focuses his litigation practice on white-collar criminal defense, government investigations, SEC & FCPA enforcement, and commercial litigation.