The Internal Revenue Service (IRS) generally has 10 years from the original assessment date to collect federal income tax. There are also legal timelines, referred to as the statute of limitations, on tax audits, underreporting and federal tax debt.
What is an IRS Statute of Limitations?
The statute of limitations refers to the window of time the IRS can conduct audits, engage in collection activities and pursue civil or criminal penalties against taxpayers.
3-Year Statute of Limitations: Tax Audits
Per federal law, the IRS is allowed to audit returns filed in the last three years. The statute of limitations begins on the day the return is due unless you file an extension. In that case, it starts on the extended due date. And if you amend your return, it doesn’t restart the clock.
There are exceptions to the rules, though. If the IRS needs to go beyond three years to investigate an important matter, it may be permitted. Consequently, experts recommend that you retain at least eight years of tax-related documentation just in case.
6-Year Statute of Limitations: Underreporting
The statute of limitations increases to six years if the IRS suspects your income is understated by more than 25 percent. To illustrate, if you earn $155,000 but only report $75,000, that’s an understatement of $80,000. Even if it’s an honest mistake, the IRS views the omission in a harsh light since it’s almost 50 percent of your income and can audit you for up to six years.
It’s also up to the IRS to decide if the error was unintentional or fraudulent. If they choose the latter, there is no timeline on the number of years they can audit you.
10-Year Statute of Limitations: Tax Debt
The IRS can collect back taxes for up to 10 years, starting with the date the tax was assessed. However, this period can be extended if the IRS has suspicion to believe fraud was committed. It could also be longer if the statute of limitations is suspended due to a bankruptcy filing or some other circumstance that legally prevents the IRS from pursuing collection action against you. And suppose you enter into an installment agreement. In that case, you’ll generally be required to sign a document that indicates your agreement to waive the 10-year limitations period.
What Are the Exceptions to the Audit Statute of Limitations?
The IRS could request that the statute of limitations be extended in the following circumstances:
- You fail to file a federal tax return.
- You don’t sign your federal tax return.
- You file a fraudulent federal tax return.
- You overstate deductions and credits on your federal tax return, resulting in the underpayment of federal income tax.
What to Do If You Owe Taxes and Can’t Pay Them
Fortunately, the IRS offers options through the Fresh Start Initiative (formerly known as the Fresh Start Program) to help you resolve back taxes.
Offer in Compromise
If you’re experiencing financial hardship, you could qualify for an offer in compromise (OIC). The IRS will agree to settle unpaid tax debt (including interest and penalties) for a fraction of what you owe.
Before applying, you want to file all legally required returns and be current on all mandatory estimated tax payments. Also, note that the process is quite complex and could warrant the assistance of a seasoned tax professional with experience handling OIC applications.
Installment Agreements
Installment agreements are also an option if you owe taxes and can’t afford to pay the outstanding balance. The IRS offers three payment plans:
- Short-Term Payment Plan: gives taxpayers who owe less than $100,000 (in federal income tax, interest and penalties) between 120 and180 days to remit unpaid taxes
- Long-Term Payment Plan: an installment agreement that grants taxpayers who owe $50,000 or less (including interest and penalties) up to 72 months to pay back taxes; businesses with unpaid tax debt of $25,000 or less who are current on all required return filings could also qualify
- Extended-Term Payment Plan: the terms depend on your income, expenses and liabilities, and are generally negotiated by a tax professional or tax relief firm
Hire a Professional
Wondering if you should hire a professional to assist you with resolving back taxes? It’s a personal decision, but ignoring unpaid tax debt could have severe consequences for your finances. However, a reputable tax firm can assess your situation and review viable options to help you make an informed decision.
Other Common Questions About IRS Audits
Below, you will find frequently asked questions about IRS audits.
What are the chances of the IRS auditing your tax returns?
There’s less than a 1 percent chance that you’ll get audited by the IRS. However, your returns could be selected for review at random due to a related examination. In some instances, the information in your return could also trigger an audit.
What triggers an IRS audit?
Here are some common audit triggers:
- Discrepancies between the wage and income information on your return and what the IRS has on record
- Excessive charitable donations relative to your earnings
- Home office deductions
- Omitted or transposed numbers, and other math errors
- Round numbers on several tax forms
- Underreported income
- Unreasonable business expenses
- Excessive Schedule C losses (if you’re self-employed or an independent contractor)
How long does an IRS audit take?
The length of an IRS audit is determined by its scope and the schedule of involved parties. Delays could also arise if the taxpayer or business disagrees with the audit findings.
Can the IRS audit you 2 years in a row?
Yes, the IRS is legally permitted to audit you 2 years in a row.
