Navigating the Timing of IRS Audit Rules: Timelines and Considerations

After filing taxes, many individuals find themselves gripped by anxiety about possible errors or omissions on their returns. Misreported income, inappropriate deductions, or entirely unfiled past returns can trigger fears of impending audits or penalties from the Internal Revenue Service (IRS). Understanding the statute of limitations on tax audits can provide some peace of mind or, conversely, motivate you to address potential issues before they escalate.

The statute of limitations on tax matters can extend for three years, six years, or ten years and more, depending on the specifics of the situation. Here is an explanation of how these time frames apply and what actions you might consider if you find yourself questioning the accuracy of your past filings.

Three-Year Limit

The standard period for the IRS to audit a tax return is three years from the filing deadline of the return, which is usually April 15, or October 15 if a six-month extension was filed. This timeframe applies irrespective of whether the tax return was filed earlier than the deadline. For instance, a return filed on March 1, 2024, falls under the purview of the IRS for audit purposes until April 15, 2027.

During this three-year window, the IRS can inquire and audit returns. If discrepancies are found, the agency will issue a Notice of Deficiency, providing the taxpayer 90 days to contest the findings. Most IRS audits within this period are triggered by discrepancies between taxpayer returns and information from W-2 or 1099 forms provided by employers or financial institutions. Other triggers include deviations from norms, like unusually large business losses.

Six-Year Rule

If a taxpayer omits more than 25% of their income on their tax return, the IRS has six years to conduct an audit. This extended period starts from the original filing deadline of the return, just like the three-year limit. It’s important to note that this rule applies to gross income, combining all sources. For instance, unreported income from a side job and a capital gain that totals 20% of the taxpayer’s gross income would still fall under the three-year statute, not six.

10 Years or More

In some cases, there is no statute of limitations for auditing a tax return. This applies if the return was never filed, certain foreign income was omitted, or in cases of fraud. For non-filers, the statute of limitations never starts, meaning the IRS can audit them at any point if it becomes aware of their need to file.

The IRS also has the authority to extend the collection period up to 20 years under certain conditions via a federal court order, typically for substantial tax liabilities exceeding $150,000.

Practical Considerations

Understanding these guidelines can help taxpayers navigate the complexities of potential audits and the associated anxieties. When taxpayers become aware of possible errors on their returns, they should proceed with caution and seek professional guidance. For more information or any questions you may have, please reach out to your LMC professional.