How Long Does the IRS Have to Audit Your Returns?

Understanding how long the IRS has to audit your tax returns can alleviate some anxiety about potential audits. This period, known as the Assessment Statute Expiration Date (ASED), dictates the maximum time the IRS has to audit and assess taxes. After this period, any tax assessment made is considered an overpayment that must be credited or refunded.

Three-Year Period

• The general rule is that the IRS has three years from the due date of your return or the date you filed it to conduct an audit and impose any tax assessments. For example, if you file your 2020 tax return on April 15, 2021, the three-year period for the IRS to assess taxes ends on April 15, 2024. If you file on October 15, 2021, the period extends to October 15, 2024.
• The IRS typically audits returns within 12 to 18 months of filing. Auditors are instructed to complete audits of individuals within 26 months and business audits within 27 months, including processing, appeal, and closing letter issuance.
• For owners of pass-through entities like partnerships or S corporations, the three-year period starts when the individual owner files their individual tax return (Form 1040), not when the entity’s return is filed.

Five-Year Period

• A five-year statute of limitations applies to certain cases involving the Employee Retention Credit (ERC). For ERCs claimed for the third and fourth quarters of 2021, the period extends to five years. However, the Infrastructure Investment and Jobs Act limited the ERC for the fourth quarter, so the five-year period applies mainly to the third quarter of 2021 ERC claims. For other ERC periods, the usual three-year statute applies.
• For payroll tax returns filed before April 15 of the following year, the return is treated as filed on April 15 of the next year for statute of limitations purposes. An amended return does not extend the statute of limitations.

Six-Year Period

The statute of limitations extends to six years in cases of substantial underreporting of income or overstating tax basis. Specifically:

• Substantial Understatement of Income: If you omit more than 25% of your gross income, the IRS has six years to assess taxes. For instance, if you report $200,000 in income but omit $60,000, this exceeds the 25% threshold, extending the limitation period to six years.
• Overstatement of Tax Basis: Misstating the tax basis of property also leads to a six-year statute of limitations period, if it results in a substantial understatement of taxable gain. For example, the six-year statute applies if you sell property and overstate its tax basis leading to a large understatement of gain.
• Omission of Foreign Income: If you fail to report more than $5,000 in foreign income, the six-year statute applies, regardless of whether you filed Form 114 (FBAR) for foreign accounts.

No Time Limit

Certain situations allow the IRS unlimited time to audit and assess:

• No Return Filed: The IRS can audit indefinitely if you do not file a tax return because there is no statute of limitations.
• Fraudulent Returns: No statute of limitations exists for returns filed with fraudulent intent to evade tax. Including cases where fraud is committed by a tax preparer on your behalf.

Amended Returns and Extensions

• If you file an amended return, the limitations period is based on the date the original return was filed, not the amended return. However, if an amended return is filed within 60 days of the three-year limit, the IRS has an additional 60 days to assess taxes.
• The IRS may request an extension of the statute of limitations during an audit. You can voluntarily agree to this extension by providing more documentation and resolution time. You can also negotiate terms and limit the extension to specific items or a set duration.

Key Takeaways:

1. General Rule: The IRS has three years from the return’s due date or actual filing date to audit and assess taxes.
   
2. ERC Claims: Certain ERC claims are covered by a five-year period, with potential legislative changes extending this to six years.
   
3. Six-Year Rule: The statute extends to six years for significant underreporting, overstating basis, or omitting foreign income.
   
4. No Limit: No statute of limitations for unfiled or fraudulent returns.
5. Extensions: Taxpayers can extend the statute of limitations by agreement, which can be negotiated for specific items or timeframes.
   

Understanding these timelines helps ensure compliance and prepare for potential audits effectively.