There is a time period that the Internal Revenue Service can audit tax returns. There is is a statute of limitations on IRS audits and tax assessments. The time period is called Assessment Expiration Date (ASED). Once the limitations period expires, the IRS cannot audit your return or assess any additional tax.
You may have heard that the statute of limitations on audits is three years. That is generally the case, but not always. Depending on the circumstances, the IRS could take far longer to audit your return, and sometimes forever.
Unless another limitations period applies, the IRS has a maximum of three years to audit your return and impose a tax assessment. The three-year period starts to run on the later of
- the due date of the return (usually April 15 or March 15 for calendar-year taxpayers), or
- the day you file your return.
As a practical matter, the IRS usually audits returns 12 to 18 months after taxpayers file them.
If you are an owner of a pass-through entity such as a multi-member LLC, an S corporation, or a partnership, the three-year limitations period does not start to run when the entity’s return is filed. It starts when you file your individual tax return. Each pass-through owner’s individual income tax return is treated as separate from the entity return, and the statute of limitations is computed separately for each return.
The IRS has much more time to audit your return if you engage in certain bad conduct.
The IRS has six years to audit your return if you underreport your gross income by more than 25 percent or fail to report more than $5,000 in foreign income.
Illustration. Andy, a taxpayer, reports $200,000 of gross income and claims $150,000 in deductions on his Schedule C. He reports no other income on his return. But he failed to report $60,000 of interest income or other income for the year. The unreported $60,000 equals 30 percent of the $200,000 gross income reported on his return. Thus, the 25 percent threshold was exceeded and the six-year limitations period applies.
A five-year limitations period applies to certain employers who claimed the Employee Retention Credit (ERC) during 2021. H.R.7024, which passed the House 357-70, could extend the ERC audit time to six years.
There is no limitations period if you fail to file a return, or if you file a false or fraudulent return with the intent to evade tax. This is true even when your tax preparer, not you, committed the fraud.
There is no statute of limitations where no return is filed. The IRS has forever to audit non-filers because it can take the IRS many years to discover non-filers. The key point is to always file a tax return, even when you do not owe any taxes.
Fraudulent returns. There is also no limitations period on audits and assessments where a taxpayer files a false or fraudulent return with intent to evade tax. Filing an amended non-fraudulent return after a fraudulent return does not change this.
Fraud is not clearly defined in the tax code or in IRS regulations. Instead, the IRS looks for indicators or badges of fraud, like understating income, not maintaining inadequate records, concealing income or assets, failing to cooperate with IRS auditors, engaging in illegal activities, providing incomplete or misleading information to a tax return preparer, filing false documents, including false tax returns. Fraud for these purposes is not necessarily limited to fraud by you. The IRS and the Tax Court take the position that if your tax return preparer committed fraud on your return, the fraudulent return exception can also apply to you. This is so even if you did not know of the preparer’s fraudulent intent when you filed your tax return.
It is recommended that you amend your tax return when you discovered the fraud. You generally could amend your tax return within 3 years after the date you filed your original return or within 2 years after the date you paid the tax, whichever is later.
If you are under audit, the IRS will ordinarily ask you to agree to extend the limitations period long before it ends. You do this by signing a consent form. Some taxpayers agree to do this. If you do not consent, the IRS will close the audit and typically impose an immediate assessment.
Hiring a tax resolution expert is the best action a taxpayer could take in a tax matter before the IRS or a state tax authority.
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