Worrying about an IRS audit can feel daunting, but there’s good news: the IRS has a limited time frame to audit your returns and assess any additional taxes. This period, known as the Assessment Statute Expiration Date (ASED), provides a clear deadline for the IRS to wrap up audits and issue any tax assessments. Understanding these limitations can help you breathe easier and avoid unnecessary stress.

The General Rule: Three-Year Statute of Limitations

In most cases, the IRS has up to three years to audit your tax return and impose any additional tax assessments. This three-year clock starts ticking on the later of these two dates:

1. The due date of your tax return (typically April 15 for individual taxpayers).
2. The actual date you file your return.

For instance, if you filed your 2020 tax return on April 15, 2021, the IRS has until April 15, 2024, to audit that return. However, if you filed on October 15, 2021, after receiving an extension, the IRS’s deadline extends to October 15, 2024.

While the IRS aims to complete most audits within 12 to 18 months after a return is filed, it’s worth noting that they have an internal guideline to finish individual audits within 26 months and business audits within 27 months. This allows additional time for any necessary appeals, assessments, and the issuance of closing letters.

Key Tip: Keep records of when you filed your tax return, especially if you file electronically or by mail. Proof of timely filing can protect you from unnecessary complications down the line.

Five-Year Statute of Limitations for Certain Employers

If you claimed the Employee Retention Credit (ERC) for the third or fourth quarters of 2021, be aware that the IRS has a special five-year period to audit these returns. However, due to legislative changes, this five-year limit mainly applies to ERCs claimed for the third quarter of 2021.

For example, if you filed your third-quarter 2021 employment tax return on October 31, 2021, and later amended it on March 1, 2022, the IRS has until April 15, 2027, to audit that return.

Alert: Legislation such as H.R. 7024 might extend the limitations period for ERC audits to six years, so stay informed about any changes.

Six-Year Statute of Limitations for Specific Situations

The IRS may extend the audit window to six years in cases of significant underreporting of income or overstatement of tax basis. For example:

• If you omit more than 25% of your gross income from your return, the IRS can audit you for up to six years.
• Overstating the tax basis of a property, which results in understating your taxable gain, can also trigger this six-year period.

Additionally, if you fail to report more than $5,000 of income from foreign financial assets, the IRS has six years to audit your return.

No Statute of Limitations for Fraud or Non-Filing

The IRS has no time limit to audit returns if you:

• Never filed a tax return. The IRS can audit non-filers indefinitely.
• Filed a fraudulent return with the intent to evade taxes. Even if you later file a correct return, the IRS can still audit you without any time constraints.

Fraud isn’t limited to your actions alone. If your tax preparer committed fraud on your return, the IRS could apply the same unlimited audit period to you, even if you were unaware of the fraud.

Filing Amended Returns and Extending the Statute of Limitations

If you need to amend your tax return, do so within three years of the original filing date. The statute of limitations for the IRS to audit your return remains based on the original filing date, not the amendment date. However, if you file an amended return close to the three-year deadline, the IRS gets an extra 60 days to assess any additional taxes.

If you’re under audit, the IRS may ask you to voluntarily extend the statute of limitations by signing Form 872. This extension can give you more time to provide documentation, request an appeal, or claim a refund. Remember, you can negotiate the terms of this extension, limiting it to specific items or a shorter period, reducing your risk of further scrutiny.

Key Takeaways

Here are five takeaways from this article:

1. Three-Year Rule: The IRS generally has three years to audit your return after the due date or the actual filing date.

2. Five-Year Rule for ERC: Employers who claimed the ERC for late 2021 may face a five-year audit window.

3. Six-Year Rule for Underreporting: The IRS can audit you for six years if you underreport your income by more than 25% or fail to report significant foreign income.

4. No Time Limit for Fraud or Non-Filing: The IRS can audit you indefinitely if you didn’t file a return or committed fraud.

5. Extending the Statute: You can extend the audit period voluntarily, but it’s wise to negotiate the terms.

Understanding these rules can help you navigate the audit process more confidently, ensuring you’re prepared no matter what.