What is the IRS Audit Statute of Limitations?

Trung Tran

Expert Contributor
Last Updated: December 9, 2021

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Filing your tax return to the IRS can be an absurdly arcane process depending on who you are. Business owners, people with foreign assets, and even charity contributors all seem to have extra hoops to jump through to satisfy the IRS. It is not surprising that people make mistakes under those circumstances. In some cases, these mistakes can result in you understating your income, which is the best way to get on the IRS’s bad books. With that said, what is the IRS audit statute of limitations?

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Standard Procedure

You have been notified that the IRS suspects that your banking activities are not entirely on the up and up. Given that the issue is only a minor error, the IRS will only be able to act upon their findings if said findings are detected within three years of when they were originally filed. After this three-year period, small mistakes or omissions within a few hundred dollars or less than 25% of your income will mostly be left uncontested. Where things really start becoming a problem is when the discovered errors become too large to overlook.

It’s also worth mentioning that IRS audit statute of limitations are not going to stop the IRS from pursuing you for money that is due to them based on discoveries that have already taken place. You will still be liable for any penalties that the IRS has placed on you despite filing the tax return in question past the statute of limitation. Do not count on it to protect you in that case.

Problems Arise

Previously, the IRS audit statute of limitations in almost all cases was three years. A decision by the Supreme Court in 2012 supported this by stating that, “Three years to audit is plenty.” The precedent set by this landmark case would not last though. In October 2015, Congress decided to overrule this decision, giving the IRS much more freedom to pursue a six-year statute of limitation.

Today, there can be a few situations in which the IRS will be allowed to dig up tax returns filed six years back. As was referenced above, if it turns out that you omitted over 25% of your income, then you can be held responsible as far as six years back. Also, if it is revealed that you have income from a foreign source of at least $5,000, then the IRS will have the same six years to audit you. This income also includes passive income such as stock value growth.

What is the IRS Audit Statute of Limitations?

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Form 5471

While a six-year IRS audit statute of limitations is already quite a long time to have to worry about whether or not you missed a decimal point in your tax return, that’s still not the actual limit. If you failed to submit specific documentation in one tax year, it’s entirely possible that the IRS will be able to audit for details regarding that year forever. One such document that could be the catalyst for this is Form 5471. Otherwise, know as the Information Return of U.S. Persons With Respect To Certain Foreign Corporations.

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Form 5471 asks for a vast array of information regarding your relationship with foreign corporations including:

Your Personal Information.
Your voting stock in the foreign corporation.
Information about the foreign corporation in question.
The stock of the foreign corporation.
An income statement and balance sheet.
Current earnings and profits.
Summary of shareholder’s income.
Other miscellaneous information.

Other forms may leave you vulnerable to indefinite IRS audit statute of limitations if you fail to submit them. You may think it absurd that the IRS would look so far into the past for issues with your tax returns. Interestingly, the precedent is already set in a previous case known as Beeler v. Commissioner. In this case, Mr. Beeler was held accountable for penalties that applied to documents filed 30 years before. Considering that extreme instance, there aren’t any hard limits for how far the IRS can dig back under the right conditions.

Mutual Extensions

The IRS may request to extend the duration of the audit if the established date of the IRS audit statute of limitations is closing in. As the subject of the audit, you can then agree or decline the extension. Everyone agrees that it can be uncomfortable being audited. Even with a clear conscience, it can be hard to know if there was some incriminating oversight that you didn’t know about. If you are stressed out about an audit, know that it is a precautionary measure. If you haven’t done anything wrong, then the IRS won’t find too much to suspect you.

Their audit of you is not happening in a vacuum. During that time, you are also able to find more documents, information, and testimonies that can help you defend yourself from the claims of the IRS. While an extension of the statute of limitations is allowing the IRS to dig up more about you, it’s also a chance for you to dig up some helpful details about yourself too. If you do choose to refuse the extension of the audit, a conclusion will still be drawn based on the information available to the auditor at the moment.

Summary

Basically, an audit isn’t going to look beyond three years if there are just minor infractions. The IRS won’t bother going past two years most of the time. The audit could look back as far as six years if it’s found that the amount of income omitted from a tax return was over 25% of your gross income. Beyond that, there’s no telling how far back the IRS could go if you fail to submit some necessary forms one year. Do your due diligence, and consult someone if you have any problems.

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Trung Tran

Expert Contributor
Last Updated: December 9, 2021

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