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21 Min. Read

How Far Back Can IRS Audit? Everything You Need to Know

How Many Years Can You Be Audited?

The Internal Revenue Service (IRS) may sometimes select people or businesses for an audit. The IRS uses random sampling and computer screening for selection, or they may select you if you’ve conducted business with someone else who was selected for an audit. 

For small business owners, it’s important to understand how far back the IRS can audit so you know how long to hold on to your receipts, financial records, and other tax-related data in case you or your business is selected for an audit. In the following article, we will explore the statute of limitations of audits, what may trigger an audit, and how to navigate different types of audits with updated 2024 information from the IRS guidelines.

Key Takeaways

  • In most cases, the IRS can go back 3 years in an audit, but if there are substantial problems they may go back further.
  • The IRS may increase the audit timeline to 6 years if you report 25% or less of your income or have omitted over $5,000 in foreign income on your tax return.
  • The statute of limitations is the legal time limit the IRS has to collect, review, analyze, and resolve your tax problems. 
  • The statute of limitations is indefinite if you don’t file your taxes, agree to extend the time limit, file a fraudulent return, or omit certain important forms concerning overseas income.
  • The IRS can audit you for multiple years consecutively if your documents continue to raise red flags.
  • There are different types of audits, including a simple audit, a more serious audit, an eggshell audit, and a reverse eggshell audit, each with varying procedures and consequences.
  • Taking care when filing taxes, double-checking your work, and keeping strong financial records year-round can help avoid triggering an audit.

Table of Contents

How Far Back Can the IRS Audit You? 

In most cases, the IRS will include the past 3 years in an audit, but if there are substantial errors or issues found, they may go back further. Most of the time, the furthest they will go back is 6 years. Most audits will be done on tax returns filed within the last 2 years. 1

If you are a taxpayer or small business owner wondering how far the IRS can go back during your audit, the answer depends on your unique situation. Some common exceptions to the 3-year rule include a 6-year audit period for a substantial error (like underreporting your income) and there is no time limit if you fail to file or send in a fraudulent return, as tax evasion and fraud are criminal activities. 

If you’ve made a genuine error while filing your taxes, don’t panic. Follow the instructions provided by the IRS, give the information requested, and they will walk you through the process. 

Turn Tax Pains Into Tax Gains

What Is the Statute of Limitations on an IRS Audit? 

The statute of limitations is a specific, legal period that the IRS has to review, analyze, and resolve your issues, after which they cannot continue to assess, collect additional tax, or allow you to claim a tax refund. It is usually 3 years after your tax forms are due or filed, whichever is later. 

The 3-year rule begins after any extensions you’ve been granted or if you filed late. This period is known as the Assessment Statute Expiration Date (ASED). 2 If you don’t file your tax returns, the statute of limitations does not begin, meaning the IRS can come back and audit your return indefinitely. 

It’s possible to extend the statute of limitations, which can give you more time to provide important documentation and can give the IRS more time to process your results. If a request is made to you to extend the statute, you can refuse, which will cause the auditor to decide the outcome based on the information they currently have. 

How Many Years in a Row Can the IRS Audit You? 

The IRS can audit you multiple times, even in consecutive years. In most cases, the agent on your case will not know you have been audited the year before, but your return will still have red flags that trigger an audit. A return from a given year cannot be audited more than once, so once you’ve come to a resolution, the file for that year cannot be re-opened unless you request it or there is evidence of fraud.

The 3-Year and 6-Year Audit Rules 

Specific rules determine how many years the IRS can go back during an audit. The 3-year rule applies to most audits. This means that the statute of limitations runs for 3 years after you have filed your return or the due date, whichever is later. If you’ve filed a late return, the 3-year audit period begins after the paperwork is filed, but if you file early, the 3 years starts on the date the taxes are due. This gives the IRS more time to process each individual’s accounts, and ensure there are no tax issues to contend with. Taxpayers must also abide by the 3-year rule, filing an amended return within the same timeframe. 

The 6-year rule goes into effect in a few key cases:

  • If you report 25% or less of your income on your return, the IRS can extend the time to assess additional tax changes from 3 to 6 years. This same 6-year, 25% rule may be applied if you fail to pay 25% or more in taxes in what is known as a “basis overstatement,” where items on your tax return cause you to pay less tax than you should.
  • If you have omitted more than $5,000 in foreign income on your return. Hiding money in “tax havens” can result in a criminal investigation with serious financial and legal penalties.

Unlimited Statute of Limitations: When Does it Apply? 

There are a few cases where the IRS can audit your returns indefinitely. These situations include:

  • An unfiled return: If you don’t do your taxes, the IRS can assess that year at any time under the Substitute for Return program. When filed, the 3-year assessment limit does not begin unless you later file the tax return.
  • Agreeing to extend the time limit: If you sign a statutory waiver form, the time limit will be amended to the timeline you agree to. This is not always unlimited and you can negotiate the proposed time extension. 3
  • Tax evasion: Wilfully filing a false or fraudulent return with the intent to avoid taxes is known as tax evasion. If you’re found to have filed a fraudulent return, the IRS will go back as far as it can to obtain all necessary information. 
  • Omitting forms: Omission of certain forms, like Form 5471 if you own part of a foreign organization, form 8938 for foreign assets, or Form 5471 if you receive gifts or inheritance from foreign nationals, can cause an indefinite audit scenario.

Some other cases that may cause the suspension of the 3-year time limit on the IRS collection statute are:

  • The IRS issues a 90-day Letter or a Notice of Deficiency. In the US, you have 90 days (or 150 if you live outside the US) to agree with the IRS’s proposed assessment or to file a petition with the Tax Court. The suspension begins the day after the IRS mails the letter.
  • You filed for bankruptcy, in which case your assessment period will be suspended by the time allowed by law in your case.

What Triggers an IRS Audit? 

An audit is a serious tax matter that nobody wants to deal with. The following are some of the most common IRS audit triggers. 

High Income and Unusual Deductions 

People who earn more money are most likely to be part of the tax audit process at least once in their lifetime, with incomes of over $10 million having the highest audit rate. If your income is much higher than the national average for your same occupation, this may also trigger an audit.

Those who claim unusual or excessive deductions will be considered potentially suspicious and may require additional scrutiny on their returns. This includes large charitable donations, home office deductions, and any excessive deductions compared to your income. 

Failure To Report Taxable Income 

Remember that the IRS receives a copy of your Form W-2 and 1099 paperwork, so if any of your income sources are incorrectly reported, it will trigger an IRS audit. This is why keeping your financial paperwork is important, especially when you work different jobs throughout the year and have other income streams. Even gambling winnings must be reported on a 1040 form

Suspicious Business Activities 

Some common suspicious business activities that trigger audits include fraudulently claiming the Research and Development Credit without performing qualified research and experimentation, engaging in digital currency or digital asset transactions, or failing to report professional earnings as self-employment income. 

For example, income earned driving for a ride-share company on the weekends must also be reported along with your regular day job earnings. 

Discrepancies and Red Flags 

If the W-2 forms and 1099s the IRS receives don’t match what you’ve filed on your tax forms, they may see this error as unreported income, which makes you more likely to be chosen for an audit. Some other similar red flags include a significant income change, higher-than-average deductions, or large charitable donations. 

Foreign Income and Reporting 

US citizens who live overseas and earn an overseas income while working at a foreign corporation can exclude up to $120,000 on their tax return using the Foreign Earned Income Exclusion, but they must have been outside of the US for at least 330 days of a consecutive 12-month period and they must have a tax home in the foreign country. 

The tax break doesn’t apply if a person works in a US-based company or has not been legitimately living in a foreign country (like US government officials working abroad, deployed military service people, or American flight attendants). If you erroneously claim the exclusion, an IRS audit may commence.

If you fail to report offshore accounts (foreign bank accounts), especially if the foreign financial accounts are from countries known as tax havens, the IRS will take interest. It’s important to note that the US government can often obtain overseas account information. 

Questionable Business Expenses 

The IRS knows that sole proprietors and small business owners are most likely to be the ones omitting income or claiming excessive deductions like a personal vehicle used 100% of the time for business, claiming excessive business meals, writing off hobbies as work-related expenses, or writing off a brand new business computer every year as a home office deduction. 

If you know your business activities may seem strange, be sure to keep all your financial information organized. Itemizing all your expenses, like travel, marketing, equipment rental, legal fees, insurance, and inventory will reduce suspicion. The more detailed you can make the description, the better. 

Frequent Schedule C Filings 

Self-employed taxpayers and sole proprietors who are paid in cash under the table have more opportunities to omit or hide some of their income to commit tax fraud. If you are self-employed, it’s crucial to report all your income from any activity or business that earns you money. If you report frequent Schedule C losses, keep all documentation to prove your calculations. 4

If you receive a notification from the IRS by mail from the IRS office, it’s helpful to understand how to navigate the type of audit you’re facing. There are 3 different types of audits.

1.Understanding Simple IRS Audits 

A simple IRS audit is rather straightforward. You will need to provide documentation that supports your claims, including itemized deductions, legal papers, bills, receipts, loan agreements, and canceled checks. The IRS may also need to see medical or dental bills, tickets, theft documents, diaries, logs, or financial records. 5 Organizing these documents by type and year with a summary of transactions will help speed along the process and prevent errors. 

There is no cause for concern during a simple audit, as you’re just clearing up a misunderstanding. Depending on the situation, you may receive a questionnaire or request for information in the mail rather than an in-person interview. 

2.Identifying More Serious Audits

More serious audits may be triggered when the situation is more complex than forgetting a signature or making a math mistake. You will first be contacted by mail and the interviews will be held in person in your home, at your office, in your accountant’s office, or at an IRS office. 

The interview will involve targeted questions and the IRS may request more in-depth information from you from the past 3 to 6 years of business, which is why most tax advisers recommend keeping all financial records for at least 6 years. 

If you’ve made an error that needs to be reconciled, the IRS will work with you to identify and resolve the issue. You may receive more tax, a fine, or other penalties. These tax matters need to be resolved as quickly as possible so you can move back into good standing with the IRS. 

3.Eggshell & Reverse Eggshell IRS Audits

If the IRS believes you’ve committed a tax crime, you may be subject to an eggshell or reverse eggshell audit. These informal terms are used to indicate an audit where a taxpayer could face a criminal prosecution. The differences between eggshell and reverse eggshell audits are as follows:

  • In an eggshell audit, the IRS suspects you may have information hidden from them such as additional income or fraudulent activities, putting you at risk of self-incrimination. Revealing incriminating information might result in bigger penalties than saying nothing, but there is a danger of a criminal investigation if you lie or omit important details. 
  • In a reverse eggshell audit, the IRS already has information proving you have committed a tax crime, but they haven’t revealed the incriminating evidence against you. Making willful or intentional omissions when speaking to an IRS agent or IRS manager in this case can have severe legal repercussions.

When facing an eggshell or reverse eggshell audit, it’s best to hire a professional tax lawyer to advise you. If an IRS agent is interrogating you, remain truthful as lying or willful omission can cause even bigger problems. In some cases, your case may be given to special agents who can mount a full criminal case against you. 

Dealing with IRS Audits—From Start to Finish 

Not all audits are painful, drawn-out processes, especially if you can provide the IRS with the necessary documentation and have not committed a substantial error or omission. Here is what you can expect from an audit.

Duration of an IRS Tax Audit: What To Expect 

Most IRS audits take around 1 year to complete but some assessments may stretch beyond 2 years, especially if you no longer live in the US and have complicated overseas income scenarios. The length of your audit timeline depends on factors like:

  • The type of audit, as a correspondence audit (by mail) is usually quicker than a field audit
  • The complexity of the issues being investigated, for example, foreign financial accounts and criminal investigations will take longer to unravel than a simple math error
  • The complexity of your filing history, which determines how far back the investigation needs to go
  • The availability of both parties (you and the auditor) for meetings
  • Your level of compliance and the speed with which you supply the IRS with the documentation they’ve requested
  • Whether you ultimately agree or disagree with the findings

Any of these factors may result in potential delays, causing your audit to last longer than the typical year-long timeframe. 

Resolving Audit Results: Agreement and Disagreement 

Your audit results will be provided promptly after the investigation is complete. According to the IRS, it will conclude in 1 of 3 ways: 6

  1. No change: no changes have been made, as you have substantiated all claims and items being reviewed on your valid tax return with evidence such as receipts and itemized financial records
  2. Agreed: an audit in which the IRS proposes changes to your tax return that you understand and agree with
  3. Disagreed: audit results that you understand but do not agree with

If there is no change, there is nothing more to be done and your case will be closed with you back in good standing with the IRS. 

If changes are to be made and you agree with the audit results, you will be asked to sign the examination report and make arrangements to pay any additional money owed. 

If you disagree with the findings, you may request a meeting with an IRS manager. If you do not achieve a resolution there, you can request an appeal 7 by mailing in a written protest. This may grant you the right to a hearing where you can represent yourself in tax court or hire an attorney, a certified public accountant (CPA), or an enrolled agent authorized to practice before the IRS to represent you.

Criminal Investigations vs. Regular Audits 

An everyday IRS audit is not a criminal investigation. A regular audit is simply a verification of compliance or a mistake in your paperwork, a math error, or a misunderstanding. A criminal investigation, on the other hand, is initiated when information obtained from a revenue agent, revenue officer, or investigative tax professional indicates fraudulent activity or tax evasion. 8

The decision to open a criminal case is not taken lightly. IRS agents must refer the case to a special agent who will analyze the relevant information, the front-line supervisor will approve or decline further development, and from there the head of the office will initiate a “subject criminal investigation.” 

Understanding the Frequency of IRS Audits 

For most taxpayers, if you are selected for an audit, it’s due to random selection and computer screening, based on a statistical formula. Your tax return will be compared to statistical norms based on similar returns of other taxpayers. If everything is normal, your likelihood of being flagged for an audit is very low.  

If you are audited for the same issue each year and have minimal changes to your business and financial operations, you can request an IRS “repetitive audit” consideration from the IRS agent assigned to you. 

Legally, the IRS has the right to audit you every year, but if you have a no-change letter regarding past tax returns and any additional documentation they request, the agent may be able to talk to their supervisor about canceling the audit. 

How To Avoid an IRS Audit in the Future 

While these tips cannot guarantee you’ll avoid an audit in the future, there are some proactive measures that you can take to reduce your audit risk. 

  1. Avoid careless math errors by double-checking your work. The majority of audits are triggered by discrepancies and simple math mistakes. Even rounding your numbers to the nearest dollar amount may cause suspicion and bring attention to your paperwork.
  2. Make sure you file your taxes on time to create a compliance history, which may reduce suspicion directed towards you. 
  3. Be careful not to leave anything blank, even if the answer is $0. Unintentional oversights and blank spaces may bring attention to your return.
  4. Avoid reporting expenses that amount to more than you earned in the year, as a net annual loss (especially a small loss) may look like underreported income to the IRS. Similarly, avoid making unsubstantiated deductions. Be honest in your return and avoid overestimating the amount.
  5. Be explicit when itemizing business expenses, ensuring you are being as transparent as possible. Ambiguity may look like deception to a keen-eyed IRS agent. Make sure to provide additional paperwork to explain any odd expenses or losses in detail. 
  6. Avoid submitting amended returns if possible, as these are more often flagged for a closer examination during manual processing. If you must amend your return, attach supporting documents that support the changes you’ve made. 
  7. Don’t forget to sign your return. It’s a simple step, but it may trigger an audit as the IRS may assume you’ve missed other imported steps.
  8. Consult with a tax professional, especially if your situation is complex. A professional can guide you and ensure all details are correct before filing. 

Stay Stress-Free with FreshBooks 

Don’t let IRS audits scare you. Finding out that your business is being audited can be stressful even when you have nothing to hide. With FreshBooks’ easily accessible, cloud-based accounting software, you can access all the information, tax records, and financial documents the IRS agent needs in minutes, from anywhere. You can keep your records organized and safe in the cloud for years, ensuring you’ll have all the documents at your fingertips at the click of a button. 

FreshBooks accounting software can help you stay organized and ready for any challenge your business faces. Try FreshBooks for free today, and see how easy it can be to integrate our helpful software into your everyday business practices. 

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Frequently Asked Questions About How Far Back the IRS Can Audit 

Some of the most commonly asked questions about how far back the IRS can audit you and how they audit tax returns are answered in the section below. 

Can the IRS go back more than 10 years? 

No, the IRS can only go back up to 6 years to audit and assess your tax return. Some extenuating circumstances, like suspicion of fraud, may extend the statute of limitations further and they have up to 10 years to collect any taxes and associated penalties or interest accrued. 

Does the IRS forgive back taxes after 10 years? 

Yes, the IRS forgives back taxes after 10 years. You may have multiple Collection Statute Expiration Dates (CSEDs) for multiple tax assessments. In most cases, 10 years after your tax was assessed, the debt is forgiven, although some scenarios may suspend or extend the CSED. 9

What happens if you don’t pay taxes for 10 years? 

If you haven’t paid taxes, the IRS may impose penalties like fines or jail time for tax evasion. If you don’t have enough money to pay the full amount, you can set up an installment plan or try filing an offer in compromise to reduce the amount you owe.

Can I get a tax return from 10 years ago? 

No, you can’t get a tax return from 10 years ago. If you are due a refund, but don’t file your tax returns within 3 years of the due date, you can’t claim your refund nor can you claim any credits from that period. You may also miss out on Social Security benefits or have issues obtaining a loan. 

Does the IRS destroy tax records after 7 years? 

No, the IRS destroys most individual returns after 6 years, unless the timeline is extended because they are associated with an “open balance due.” For example, returns filed in 2018 will likely be destroyed in 2025.

What are the new IRS rules in 2024? 

Standard deductions have increased, especially for those aged 65 or older and for individuals who are blind. Income tax brackets have also been adjusted due to inflation, certain employee benefits have changed, and the foreign earned income and gift exclusions have increased. 10

Article Sources:

  1. IRS. “IRS Audits” Accessed March 25, 2024.
  2. IRS. “Time IRS Can Assess Tax” Accessed March 25, 2024.
  3. IRS. “Extending the Tax Assessment Period” Accessed March 25, 2024.
  4. IRS. “About Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship)” Accessed March 25, 2024. 
  5. IRS. “IRS Audits: Records We Might Request” Accessed March 25, 2024.
  6. IRS. “IRS Audits” Accessed March 25, 2024.
  7. IRS. “Requesting an Appeal” Accessed March 25, 2024.
  8. IRS. “How Criminal Investigations Are Initiated” Accessed March 25, 2024.
  9. IRS. “Time IRS Can Collect Tax” Accessed March 25, 2024. 
  10. IRS. “IRS Provides Tax Inflation Adjustments for Tax Year 2024” Accessed March 25, 2024. 

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Sandra Habiger, CPA

About the author

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.