Most of us think the IRS can audit you for the last three years, but that is only part of the story. It is possible for an IRS audit to hit up to six years, or even more, depending on your circumstances.
For example, if the income you reported on your tax return is off by 25% or more, the IRS can go back six years. An error in your favor of more than 25% is called a substantial understatement and it doubles your IRS audit statute.
Note that this substantial understatement works only one way. You have three years to amend your return and claim a refund. If you over reported your income by 50%, and amend your returns 4 years later, that refund is barred by the statute of limitations… which means you get nothing.
Your IRS audit time clock also goes to six years if you omit more than $5,000 of foreign income from your return. It doesn’t matter what percentage this is to your gross income. If your total income is $500,000, and you inadvertently omit $5,000 of foreign income, the Service can audit that return for up to six years from the date of filing.
Also, there is no time limit for an IRS audit if they can prove fraud on your return. It is tough for the IRS to prove fraud, so it is used sparingly. But, if they can show you tried to hide income, they can go back as far as they like. I have seen this used as far back as 10 years. Imagine trying to prove your expenses from 10 years ago.
I should point out here that all of these statutes begin from the date you file the form or return. If you never file your 1040, your three or six year IRS audit statute never starts. If you file your 2010 return in 2014, the IRS has three to six years from that date in 2014 to audit your 2010 return.
Those are the standard IRS audit timelines, but there are a few lesser known extensions. For example, you and the IRS might agree to extend the audit statute.
Let’s say you’re in the middle of an audit, and you are holding your own. If the audit statute is going to expire in a few months, the Service will ask you to sign an extension. I usually recommend the client grant the extension.
The reason to give the extension is that, if you don’t comply, the auditor will disallow all of the deductions on your return, make any additions they wish, and assess the tax, thereby ending the audit.
You now have a tax bill and a completed audit, so the IRS audit statute is no longer an issue. This means you must file an appeal and deal with someone else at the IRS… who might be worse than the original auditor. For this reason it is rare for me not to grant the extension… unless I really want to change IRS representatives.
Also, filing an amended return can extend your IRS audit statute. If you file a return showing you owe additional money to the Service, the statute is extended for 60 days or longer. Therefore, never file an amended return with a balance due (an increase in tax) after the three year audit statute has run.
Note that your state might have different audit time frames. For example, my cash strapped State of California gets four years, rather than three, to come after me and my tax returns.
I hope this article has been helpful. As you can see, the IRS audit timeline begins with the filing of your return. You must be able to prove when you submitted those forms. If you send them by mail, they should go in certified. If you file online, be sure to keep the electronic receipt.
What’s Next?
Let’s face it, taxes for expats and the offshore markets is specialized information that your mom and pop accountant down the street is not going to understand. Speak with our CPA if you are serious about reducing your tax obligations and staying compliant – Click Here To Find Out More
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Most of us think the IRS can audit you for the last three years, but that is only part of the story. It is possible for an IRS audit to hit up to six years, or even more, depending on your circumstances.
For example, if the income you reported on your tax return is off by 25% or more, the IRS can go back six years. An error in your favor of more than 25% is called a substantial understatement and it doubles your IRS audit statute.
Note that this substantial understatement works only one way. You have three years to amend your return and claim a refund. If you over reported your income by 50%, and amend your returns 4 years later, that refund is barred by the statute of limitations… which means you get nothing.
Your IRS audit time clock also goes to six years if you omit more than $5,000 of foreign income from your return. It doesn’t matter what percentage this is to your gross income. If your total income is $500,000, and you inadvertently omit $5,000 of foreign income, the Service can audit that return for up to six years from the date of filing.
Also, there is no time limit for an IRS audit if they can prove fraud on your return. It is tough for the IRS to prove fraud, so it is used sparingly. But, if they can show you tried to hide income, they can go back as far as they like. I have seen this used as far back as 10 years. Imagine trying to prove your expenses from 10 years ago.
I should point out here that all of these statutes begin from the date you file the form or return. If you never file your 1040, your three or six year IRS audit statute never starts. If you file your 2010 return in 2014, the IRS has three to six years from that date in 2014 to audit your 2010 return.
Those are the standard IRS audit timelines, but there are a few lesser known extensions. For example, you and the IRS might agree to extend the audit statute.
Let’s say you’re in the middle of an audit, and you are holding your own. If the audit statute is going to expire in a few months, the Service will ask you to sign an extension. I usually recommend the client grant the extension.
The reason to give the extension is that, if you don’t comply, the auditor will disallow all of the deductions on your return, make any additions they wish, and assess the tax, thereby ending the audit.
You now have a tax bill and a completed audit, so the IRS audit statute is no longer an issue. This means you must file an appeal and deal with someone else at the IRS… who might be worse than the original auditor. For this reason it is rare for me not to grant the extension… unless I really want to change IRS representatives.
Also, filing an amended return can extend your IRS audit statute. If you file a return showing you owe additional money to the Service, the statute is extended for 60 days or longer. Therefore, never file an amended return with a balance due (an increase in tax) after the three year audit statute has run.
Note that your state might have different audit time frames. For example, my cash strapped State of California gets four years, rather than three, to come after me and my tax returns.
I hope this article has been helpful. As you can see, the IRS audit timeline begins with the filing of your return. You must be able to prove when you submitted those forms. If you send them by mail, they should go in certified. If you file online, be sure to keep the electronic receipt.
What’s Next?
Let’s face it, taxes for expats and the offshore markets is specialized information that your mom and pop accountant down the street is not going to understand. Speak with our CPA if you are serious about reducing your tax obligations and staying compliant – Click Here To Find Out More
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