How Long Does the IRS Have to Audit Your Returns?

How Long Does the IRS Have to Audit Your Returns?

As a taxpayer, you may be anxious about the prospect of an IRS audit even after you have filed your returns. The idea of having to be careful of your actions because you are not sure if the tax authorities will come to your door can be very stressful. Nevertheless, it's crucial to comprehend that the IRS has only a short period to audit your returns and to check the additional taxes. This particular epoch is called the Assessment Statute Expiration Date (ASED). After the ASED is passed, the IRS is no longer able to audit your return or impose any tax assessments for that certain year.

The Three-Year Rule

In most cases, the IRS can check your tax return and add more taxes for up to three years. This three-year time limit begins on the date your tax return is due or the date you filed your return.

For instance, let's assume that you filed your 2020 tax return on April 15, 2021. The IRS will not be able to audit this return after April 15, 2024, which is the statute of limitations for this purpose. If you had filed early, on April 1, 2021, the statute would still have expired on April 15, 2024. Nevertheless, if you filed on an extended deadline of October 15, 2021, the statute of limitations would be the one for October 15, 2024.

The proof of the filing of the return is necessary to be kept. The electronic postmark date is seen as the filing date if you submit the paperwork electronically. If you mail a paper return, the postmark date is used, but the IRS has to receive your return for the date to be applicable. To be on the safe side, you should send paper returns by certified mail or a private delivery service to make sure that they are "mailed and filed on time".

Exceptions to the Three-Year Rule

Although the three-year statute of limitations applies to most taxpayers, there are some exceptions in which the IRS has more time to audit your returns.

The Five-Year Rule for Employee Retention Credit

Being an employer who said he/she got the Employee Retention Credit (ERC) for the third and fourth quarters of 2021, a special five-year statute of limitations applies. This implies that the IRS has five years from the date of filing to compute any additional taxes that are related to the ERC. Nonetheless, remember that the Infrastructure Investment and Jobs Act retroactively restricted the ERC for the fourth quarter of 2021. Hence, the five-year rule mainly concerns the third quarter of 2021.

The Six-Year Rule for Substantial Understatements

If you do not report more than 25% of your gross income in your tax return, the IRS has six years to audit your return and to set additional taxes. This also applies if you greatly exaggerate the tax basis of the property. Hence, you have an understatement of your taxable gain when the property is sold.

Besides, if you do not report more than $5,000 of gross income from foreign financial assets, like the interest earned from foreign bank accounts, the six-year statute of limitations starts.

The Bottom Line

The statute of limitations on the IRS audits can be a source of peace of mind and at the same time, it will help you to plan your tax strategies accordingly. Although, in most cases, the three-year rule applies to taxpayers, it is important to know the exceptions and the cases where there is no time limit on audits.

The way to avoid the IRS auditing you is to have the records, file your tax returns on time, and be transparent in your tax reporting. Besides, if you do end up with an audit, don't be shy to ask for the help of a professional tax expert to assist you in the way.