Receiving any notice from the IRS can be unsettling, but an audit notice often brings a specific question to mind: just how far back do tax audits go? It’s a natural and important question. Understanding the answer is key to knowing your rights and the potential scope of any inquiry.
As a Houston-based CPA firm, we help clients navigate these situations by providing clarity on the rules. The good news is that the IRS doesn’t have unlimited power to look into your past. They operate under a specific set of time limits, known as the statute of limitations.
This guide will explain the general three-year rule, the important exceptions that can extend the audit period, and the specific rules for Texas business taxes, so you can understand what to expect.
The General Rule for the IRS’s Three-Year Time Limit
In most situations, the IRS has a three-year time limit to audit tax returns. This is the standard statute of limitations for assessment.
This three-year window begins on the date you filed your tax return or the tax filing due date, whichever is later. This is a critical point.
For example, let’s say you filed your 2022 tax year return on April 1, 2023. Since the tax due date was April 18, 2023, the three-year clock would start from that later date, giving the IRS until April 18, 2026, to initiate an audit. If you filed on an extension on October 10, 2023, the clock would start from your filing date of October 10th.
This three-year audit period covers the vast majority of situations for taxpayers who have filed their returns on time and without major, glaring issues.
When the Audit Window Expands
The three-year rule is not absolute. The answer to “how far back do tax audits go?” can change significantly if you have substantially understated your income.
This six-year rule applies if you have omitted more than 25% of your gross income on your tax return. This isn’t about a small math error or a minor missed deduction; this is a significant understatement of what you earned. In these cases, the IRS has six years to audit from the date the return was filed.
This extended time limit highlights why meticulous record-keeping is so critical for every small business owner. A simple oversight can, unfortunately, leave a tax return exposed to an audit for a much longer period.
How We Helped a Houston-Based Contractor
We recently assisted a Houston-based contractor who, during a particularly busy year, forgot to include a large 1099 payment from a major client in their tax filing. The omission was unintentional, but it represented about 30% of their gross income for that tax year.
This error, unfortunately, extended the statute of limitations on that return from three years to six. Our role was to help them understand the extended exposure and begin gathering the necessary records to be prepared for any potential inquiry from the IRS. It was a stressful situation that could have been avoided with a more robust bookkeeping process.
The “Forever” Rules When There Is No Time Limit
There are a couple of serious situations where the answer to “how far back do tax audits go?” is “indefinitely.” The statute of limitations never expires in these cases, meaning the IRS can audit those years at any point in the future.
1. Filing a Fraudulent Return
If the IRS has reason to believe a return was filed only to commit fraud, there is no time limit on their ability to investigate and assess taxes. This is the most serious category and carries significant penalties beyond just the tax owed.
2. Failure to File a Return
If you never file a tax return for a particular year, the clock on the statute of limitations never starts. This means the IRS can come back and audit that unfiled year at any point in the future. This is why it is always, always better to file your returns filed, even if you can’t pay the tax you owe at that moment. Filing starts the clock; not filing leaves the door open forever.
What About Texas? The State Audit Period for Businesses
While Texas doesn’t have a personal income tax, businesses are subject to state audits for things like Sales Tax and the Franchise Tax. It’s important to remember that the Texas Comptroller has its own set of rules.
Generally, the Comptroller has a four-year statute of limitations to audit your business records and assess any tax, penalties, or interest. This is a completely separate audit period from the IRS’s rules and has its own set of triggers and exceptions.
So, How Far Back Do Tax Audits Go?
For most taxpayers who file on time and report accurately, the answer is three years. But that window can extend to six years for significant errors and can be open forever in cases of fraud or a failure to file.
Your best defense against any audit, regardless of the timeframe, is consistent and thorough record-keeping. Clean books and well-organized documents are the foundation of a healthy financial life and provide the best support for the numbers on your tax return.
Ready to get your records in order? If you have concerns about a past tax return or want help to keep your current bookkeeping organized and defensible, the CPA-led team at Dabney Tax & Accounting Services can help. Contact us to discuss your financial situation and gain the insights for compliance.
Frequently Asked Questions
Does the audit clock start from the date I file or the tax due date?
The audit period starts from the later of the two dates. If your returns filed date is March 15th but the tax due date is April 15th, the three-year clock starts on April 15th. If you file on an extension on September 15th, the clock starts on September 15th.
How long should I keep my tax records?
Given the rules, a safe bet is to keep all your tax records for at least seven years. This covers the six-year statute of limitations for substantial underreporting and gives you an extra year of buffer. For records related to assets you own, like a home, stocks, or business property, you should keep those records for as long as you own the asset plus seven years after you sell it.
If the IRS audits one tax year, does that mean they will audit other years too?
Not automatically, but it is a real possibility. If the IRS can audit a return and finds significant errors, they may decide to expand the scope of the audit to include the tax year before or after the one in question. This is another reason why consistent, accurate record-keeping every single year is so important.
How does filing an amended return affect the audit time limit?
Filing an amended return does not typically extend the original three-year statute of limitations for the IRS to assess taxes on the original return. However, the IRS generally has a 60-day period after they receive the amended return to assess any additional tax related to the changes you made, even if the main three-year time limit has already expired.
