What Is the IRS Audit Look-Back Period?

When a taxpayer considers or first contemplates that he or she may have made a tax mistake or a tax error, panic can set in. The taxpayer may begin to panic and believe that he or she will face significant consequences which may include significant fines, penalties, and additional consequences. Some sophisticated taxpayers may immediately begin to consider whether their potential tax situation is within the statutory period during which the IRS can bring an audit, investigation, or other tax enforcement proceedings.

However, the exact IRS audit look-back period that will apply to your situation is not always clear. Once this fact becomes apparent to a taxpayer, it may only add to their concern and anxiety over the potential consequences in their matter. The good news, however, is that there are only three main look-back periods that can apply. While we can generalize the types of factors and scenarios that characterize each, taxpayers should always seek individualized tax guidance prior to making tax or financial decisions. The tax attorneys and tax professionals of the NewPoint Law Group, LLP, can assist taxpayers in assessing the facts and law likely to apply in their situation so that they can take a strategic and prudent approach to a tax issue.

The Traditional Audit Period Allows for a Three-Year Look-Back

If you are audited and do not fall into an exception or another type of special situation, it is highly likely that you will face an audit period that authorizes an IRS agent to examine up to and including your last three years of tax filings. Generally, the three-year look-back window applies for routine audits where there is no question regarding tax fraud, significant under-reported income, or other issues which will significantly complicate a tax audit or investigation.

However, even if you face the three-year audit period, that does not mean that you don’t face risks. For one, if the IRS agent discovers certain improprieties during the audit, the look-back window may be extended. Furthermore, three years of tax returns already provide IRS agents with sufficient materials to discover serious tax problems. Therefore, consult with a tax professional regardless of the type of audit you face.

In Certain Scenarios, a Six-Year Audit Period Is Justified

In certain scenarios, the normal three-year period during which an IRS agent can request and pull records and examine your finances can be doubled. The extended six-year audit window provides an IRS agent with a much larger sample of your finances and tax filings. When this audit window is authorized, the IRS agent is much more likely to be able to detect long-running fraud and other improprieties that may not be readily apparent during the limited three-year audit.

One of the times when a six-year audit period is justified is when a taxpayer fails to report a significant amount of their income. Generally, a six-year audit period is authorized when a taxpayer intentionally or accidentally fails to include greater than 25 percent of his or her annual income. As set forth above, making a significant understatement of income can include omitting income. But it is also much broader. Taxpayers who overstate the basis in a transaction resulting in a 25-percent understatement can also face the extended audit window. Furthermore, taxpayers who fail to report more than $5,000 in offshore assets are also subject to the extended audit period.

An Open-Ended Audit Will Result if You Fail to File Taxes and the IRS Can Ask for More Time

Unfortunately, there are scenarios where the audit look-back period can be even more lengthy. For one, the tax audit look-back period can extend in perpetuity when a taxpayer fails to file his or her taxes. The failure to file taxes means that a taxpayer may come to face a highly unfavorable tax return completed by the IRS. Furthermore, he or she will also be unable to claim any tax refund he or she would otherwise be entitled to receive. However, the worst aspect of being a tax non-filer is the fact that the tax year will never actually close and end up beyond the reach of the IRS.

Also important to note is that the IRS is free to request additional time from a taxpayer. In some scenarios, it is in the taxpayer’s best interest to consent to this request. However, in other scenarios, it may be strategic to pursue another route. Working with an experienced tax professional can help you make this determination.

Work with Tax Lawyers and CPAs when Worried about an Audit

If you are concerned about tax mistakes, a tax audit, or how many tax years your IRS audit will cover, it is prudent to speak to a tax attorney, CPA, or another tax professional. The lawyers and CPAs of the NewPoint Law Group, LLP, can provide guidance when you are facing a tax audit or other tax concerns. To schedule a free and confidential consultation at our Roseville law office, please call 800-358-0305 today.