Dealing with the Internal Revenue Service (IRS) can be daunting, especially if it involves an audit. One common question many taxpayers have is about the extent of the IRS’s reach into past tax years. Understanding how far back the IRS can audit can help taxpayers prepare and maintain appropriate records.
Standard audit period
Typically, the IRS has a three-year window to audit a tax return. This means the agency can review returns filed within the last three years to check for accuracy and ensure compliance with tax laws. For instance, if a taxpayer files their 2020 tax return on April 15, 2021, the IRS has until April 15, 2024, to decide to audit that return.
Exceptions to the standard rule
While the three-year rule applies in most cases, there are exceptions that can extend this period. For example, if a taxpayer underreports their income by more than 25% of what they actually earned, the IRS extends the audit window to six years. This is to provide the IRS with more time to investigate significant discrepancies.
There are also no limits on how far back the IRS can go if a taxpayer fails to file a return or if fraud is suspected. In these cases, the IRS can audit and assess taxes at any time, which underscores the importance of filing returns accurately and on time.
Reducing the risk of an audit
Taxpayers can take several steps to minimize the risk of an audit. Maintaining detailed records of income, deductions, and credits is crucial. These documents serve as evidence in case the IRS questions the accuracy of a tax return. Additionally, submitting tax returns on time can help avoid unnecessary scrutiny.
It is also important to ensure all income is reported accurately. Double-check the tax return for any errors before submission.
Importance of keeping records
Given that the IRS can audit returns from the past three years—and up to six years or more in some cases—it’s wise for taxpayers to keep their financial records for at least seven years. This timeframe covers most contingencies, including the extended period under the significant underreporting exception.
By understanding these rules and maintaining accurate records, taxpayers can better prepare for and potentially avoid the challenges associated with an IRS audit.