IRS Statute of Limitations for Tax Audits

How many years back can the IRS audit your tax return?  Have you ever wondered how long you should keep documents used to prepare your tax returns?  In this article, I review the IRS statute of limitations for audits. 

Three year statute of limitations

Generally, the IRS has three years to audit your tax return.  The three years start on either the date the tax return was due or the date the tax return was filed, whichever is later.  2014 individual income tax returns were due on April 15, 2015.  If you filed your 2014 tax return by the due date, the IRS has until April 15, 2018 to audit your tax return.  If you filed your tax return late on June 1, 2015, the IRS has until June 1, 2018 to audit your tax return.  Generally, the IRS has no authority to audit timely filed 2011 or earlier tax returns.

How long to retain records?

In most situations, you should retain records used to prepare your tax return for at least three years.  This is a general rule of thumb.  To be safe, I recommend keeping records for at least four years.  There are situations where you may need to retain records for longer.  For example, you have a rental that has been depreciated for the last 10 years.  You should keep all records for the rental such as the original purchase price and capitalized improvements.

Three year statute extended to six years

The three year statute of limitations may be extended to six years if there is a substantial omission of income.  A substantial omission of income is defined as greater than 25% omission.  For example, a taxpayer reported business sales of $100,000 on the 2014 tax return.  The IRS audited the 2014 tax return and determined that the business sales was actually $130,000.  This omission of income is greater than 25%.  Due to the substantial omission, the IRS could audit the last six years of tax returns:  2009, 2010, 2011, 2012, 2013, and 2014.

Furthermore, the three year statute is extended to six years for a fraudulently filed return or a willful attempt to evade taxes.  The IRS must prove you “intentionally” filed a fraudulent tax return to go back six years.

No statue for missing returns

There is no statute of limitations for unfiled tax returns.  The clock for the statute of limitations starts once a return is filed.   But if a return is never filed, the clock never starts.  There are situations where you may not be required to file.  However, I recommend you file even if you are not required to file to start the statute of limitations clock.