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 Navigating IRS Audits Pexels Tima Miroshnichenko

Navigating IRS Audits: Understanding the Statute of Limitations

May 22, 20242 min read

Are you concerned about facing an IRS audit? It's a common fear, but knowing about the statute of limitations on audits can offer a significant peace of mind. By understanding the rules, you can better prepare and respond if the IRS comes calling.

The Basic Rule: Three-Year Limit

Typically, the IRS has three years to audit your tax return or assess additional taxes. This period begins either on the due date of the return or the actual date it was filed, whichever is later. Most IRS audits occur within 12 to 18 months after you file your return. This three-year period is standard for most taxpayers and encompasses a wide range of common filing scenarios.

Exceptions That Extend the Audit Period

However, there are several circumstances under which the IRS can extend this timeframe:

  • Significant Underreporting: If you underreport your income by more than 25%, the IRS gains six years to conduct an audit.

  • Foreign Income: Failing to report over $5,000 of foreign income can also trigger the six-year audit period.

  • Employee Retention Credit: For employers who claimed the Employee Retention Credit in 2021, proposed legislation may allow a five to six-year period for audits due to the complexities involved in such claims.

Where There Is No Limit

It's crucial to note that there are situations where no statute of limitations applies:

  • Failure to File: If you do not file a return, the IRS can initiate an audit at any time.

  • Fraudulent Returns: Submitting a fraudulent return to evade taxes also removes any time limit on when an audit can be conducted, regardless of who prepared the return.

Considering an Extension

During an audit, the IRS may request that you extend the statute of limitations. Most taxpayers agree to this as it often indicates the IRS needs more time to review complex issues, potentially leading to a more favorable outcome. However, refusing to extend can lead the IRS to conclude the audit and immediately assess any additional taxes owed.

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Takeaways

  • Know Your Timeframes: Familiarizing yourself with the statute of limitations for IRS audits can significantly reduce anxiety and help you understand your rights and obligations.

  • Prepare for Exceptions: Be aware of actions that could extend the audit period, like significant underreporting or claiming specific tax credits.

  • Understand the Risks: Recognizing scenarios where the audit period could be extended indefinitely, such as not filing or filing a fraudulent return, is crucial.

  • Consider Extensions Wisely: If approached by the IRS to extend the audit period, consider the potential benefits and drawbacks before deciding.

Understanding these nuances can help you navigate IRS audits more confidently. If you have any concerns about your tax situation or need assistance with an ongoing audit, don't hesitate to reach out for professional guidance. This knowledge can empower you to handle IRS inquiries proactively and securely.


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