Yes, the IRS can audit you after 5 years, but it is not the standard procedure. While the typical audit statute of limitations is 3 years, they can go back 6 years for substantial errors (underreporting income by >25%), or indefinitely if fraud or failure to file a return occurred.
How far back can the IRS go to audit my return? Generally, the IRS can include returns filed within the last three years in an audit. If we identify a substantial error, we may add additional years.
6 years - If you don't report income that you should have reported, and it's more than 25% of the gross income shown on the return, or it's attributable to foreign financial assets and is more than $5,000, the time to assess tax is 6 years from the date you filed the return.
Key takeaways: The IRS can review your past three tax returns in audits — and up to six years if major errors are found. Audit odds are low, but the IRS uses automated programs to identify issues.
Correspondence audits are the most common IRS audit types. The Internal Revenue Service conducts this audit to request additional documentation from taxpayers.
Not reporting all of your income is an easy-to-avoid red flag that can lead to an audit. Taking excessive business tax deductions and mixing business and personal expenses can lead to an audit. The IRS mostly audits tax returns of those earning more than $200,000 and corporations with more than $10 million in assets.
However, you can reduce the chance of audit significantly by paying careful attention to detail and recognizing whether you are reporting a transaction of special interest to the IRS. And if you do get audited, having accurate and complete records and professional advice can make the process go more smoothly.
There's no official limit to how many years you can go without filing taxes, but the IRS expects you to file if required, and the statute of limitations on the IRS assessing tax or collecting never starts until you actually file, meaning they can pursue unfiled returns from any year, even decades old. While the IRS often focuses on the last six years, waiting increases penalties and interest, and you risk losing any potential refunds after three years; proactively filing past-due returns is always best.
The IRS will proceed to decide the issues against you if you don't respond to a tax audit. You may be liable for additional taxes, penalties, and interest that the IRS will start the collection process on.
The IRS performs audits by mail or in person. The notice you receive will have specific information about why your return is being examined, what documents if any they need from you, and how you should proceed. Once the IRS completes the examination, it may accept your return as filed or propose changes.
If the deductions, losses, or credits on your return are disproportionately large compared with your income, the IRS may want to take a second look at your return. Taking a big loss from the sale of rental property or other investments can also spike the IRS's curiosity.
What happens during an audit? Internal audit conducts assurance audits through a five-phase process which includes selection, planning, conducting fieldwork, reporting results, and following up on corrective action plans.
IRS personnel screen the highest-scoring returns, selecting some for audit and identifying the items on these returns that are most likely to need review. Large Corporations – The IRS examines many large corporate returns annually.
The IRS generally audits a larger share of high-income taxpayers than those with lower incomes, as illustrated in Figure 1. However, those who claim the Earned Income Tax Credit (EITC)—who typically have low incomes—are much more likely to face an audit than all but the highest-income taxpayers.
A tax audit doesn't automatically mean you're in trouble. While it's true that the IRS can audit people suspected of doing something wrong, that's not always the case. As part of the audit process, the IRS audits a random portion of the taxpaying public every year.
It's good to be specific, but there's a danger in words such as “everything,” “nothing,” “never,” or “always.” “You always” and “you never” can be fighting words that can distract readers into looking for exceptions to the rule rather than examining the real issue.