You file your taxes on time every year like a good taxpayer. You pay what you owe or politely wait for your tax refund to arrive in the mail. However, even if you dot all your i’s and cross all your t’s, you likely are among the 59 percent of taxpayers who worry about an audit. If you’re being honest, you have nothing to worry about as long as you keep records, but you probably don’t want to hold on to past tax documents indefinitely. Fortunately, there’s a limit to how far the IRS can go back when auditing.
TL;DR (Too Long; Didn't Read)
The IRS can go back as far as six years, but generally you’ll only see audits for up to three years.
IRS Previous Tax Returns
At the very most, the IRS will go back six years in an audit, but that only happens if the agency identifies a serious error. Most of the time, the IRS will only audit based on tax returns for the past three years. That said, if you want to play it safe, save your tax returns for the past six years, but you should be good as long as you keep three years on file.
When it comes to IRS previous tax returns, the agency says it tries to be fairly recent with its audits. This means usually staying within the past two years for audits. The IRS does limit the amount of time it can collect additional taxes on a return to three years from the date you filed or the date it was due, whichever is later. However, if an audit takes place, the IRS may request an extension of that deadline. You can disagree to allow such an extension, but doing so may force the auditor to make a quick decision based on the information provided.
Likelihood of Audit
In reality, you aren’t that likely to be audited, at least not in the way you imagine. You are 2.5 times more likely to receive a notice in the mail asking for more information than you are to sit down with an auditor to go through your records. You’ll simply get a notice in the mail requesting that you answer a question by providing supporting documentation. If you mail back the information as requested, the matter will likely be settled.
The IRS conducts 1.4 million audits each year, but it sends 178 million notices annually. Of those notices, 3.7 million merely seek clarification on underreported income. If you’re a high-income earner, though, your odds of being audited go up. Those who earn more than $1 million each year have a 1-in-25 chance of being audited, with those making in the $200,000 range facing a 1-in-80 risk. Overall, an individual has a 1-in-160 chance of being audited – a figure that should make you breathe a little easier. Still, your chances of getting a request for clarification in the mail are higher than your risk of an audit, so it’s important to maintain records for three years.
Failure to File Exceptions
Although the IRS generally will only go back a couple of years, there are instances that will allow the IRS to go back an indefinite period of time. If you don’t file a tax return at all, there is no statute of limitations for the IRS to audit you. This gives you little recourse since you are obligated to file a tax return each year by the mid-April deadline. If you can’t file on time, it’s important to ask for an extension. You can do so in a matter of minutes using the IRS e-file system.
Another instance that eliminates the time limit on IRS previous tax returns is if you filed a fraudulent tax return. In addition to giving the IRS the right to go back through your records for countless years, this also could put you at risk for fines of up to $100,000 or imprisonment for up to three years.
Filing Back Taxes
It can be easy to get behind, especially if you’re self-employed. For the self-employed, back taxes generally represent a situation where you knew you’d owe, and you simply couldn’t afford it. Even if that happens, it’s important to file and work out a payment plan with the IRS for later, but if you’re already behind, your first step should be to get caught up.
If you’re on the hook for self-employed back taxes, it’s important to file as soon as possible if you haven’t already. The IRS may have sent you a notice in the mail that you need to file. In that case, make sure you send it to the address on the notice, not the recommended address for your location. Otherwise, you’ll need to file a tax return using the forms for that year. The IRS provides a database of past publications and forms, so you can find your year and pull up the forms to file back taxes.
If You Don’t File
If you don’t file at all for one or more years, you may wait for the IRS to send you a notice. While that may come, whether it does or not, the IRS can begin charging penalties and interest on the amount you owe immediately. How does the IRS know what you owe if you don’t file? Your failure to file gives the IRS the right to file a substitution for return using information it has on you from your employers and others who paid you income during the year. Even if the agency doesn’t discover it immediately, the law allows the IRS to go back as far as necessary if a taxpayer hasn’t filed.
In subsequent years, you may be due a return for overpayment of taxes. If that happens, the IRS can hold your refund until you pay the past amounts you owe and file taxes for those years. If you continue to fail to file year after year, you could face jail time or a lien on your property until you pay. Generally, if you owe taxes that you can’t afford, you can work something out with the IRS to bring you up to date.
Negotiating Past-Due Taxes
If you owe money that you fear will lead the IRS to go back and collect, you can make an offer to negotiate that amount downward. This is called an offer in compromise and you’ll need to file all tax returns before the IRS will consider it. There is an offer in compromise prequalifier tool that will let you know whether the IRS is likely to accept. This acceptance is based on your ability to pay, your income, your expenses and your asset equity. You can choose between a lump sum cash or periodic payment option, each of which comes with fees.
Another option if you owe for IRS previous tax returns is to request an installment agreement. This also comes with two options, each of which has separate fees. One option is a long-term payment plan, which lets you pay in more than 120 days. The other is a short-term plan that requires you to pay in less than 120 days. You can save on fees by agreeing to the shorter option and/or agreeing to pay by automatic withdrawal rather than by check or debit. If you use a credit card, even more fees may apply.
- Washington Business Journal: Most Taxpayers Fear IRS Audits, But Taxpayers More Likely to Get Audit-Like Notices
- IRS: IRS Audits
- The Washington Post: Your Chances of an IRS Audit Are Way Down. But Keep It on the Up and Up.
- Tax Law Offices of David W. Klasing: How Many Years Can an IRS Audit Go Back?
- IRS: Extension of Time To File Your Tax Return
- IRS: Filing Past Due Tax Returns
- IRS: Prior Year Products
- FindLaw: What Happens If You Don't File Taxes for 10 Years or More?
- IRS: Offer in Compromise
- IRS: Apply Online for a Payment Plan
- IRS: Additional Information on Payment Plans
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.