Unless your taxes are really really simple, everyone gets that nagging fear of “what if I’m audited?” Over history the number of years the IRS can go back has varied quite a bit. So how long is it now? 7 years? 5 years? 3 years?
Back in 2012 the Supreme Court ruled that 3 years gave the IRS plenty of time to audit you. So it’s 3 years then, right?
Not so fast!
Congress extends audit period to 6 years under certain circumstances
The supreme court case that set the 3 year standard was specifically regarding omission of income. After the ruling, Congress stepped in and actually overruled the Supreme Court and gave the IRS 6 years of time!
In fact, there are a lot of exceptions that give the IRS six years – or even longer. In fact, many of these exceptions are so common now that the six year statute is more realistic for most people.
What can cause the 6 year time limit?
One case is if you omit more than a quarter of your income.
As an example, self employed construction contractors are usually paid in non-1099 checks. Basically they do the remodeling work, then the home owner writes them a check when it’s done. The government doesn’t know about it until it is reported by the contractor. People paid like this can under report their income to lower their taxes. This is directly omitting income and it puts you under the 6 year statue. Six years can add up to a lot of omitted income and a potentially huge fine looming at the end.
And “omit” can cover more than you think. While it sounds like you have “left something off” your tax return, to the IRS it can also mean that you’ve done something that “has the effect” of leaving something off of your income.
For example, say you sell a piece of property for $300k and you claim that you invested $250k into the property, when in fact you only invested $150k. You are overstating your initial investment, which means you are only paying tax on $50k instead of the $150k you actually should be paying tax on. The IRS considers this an omission of income and opens you to the 6 year statue.
In some cases the IRS has NO TIME LIMIT
If you never file a return or file fraudulently, the IRS can go after you for an unlimited amount of time. And another scary rule is that you can be audited forever if you omit certain tax forms.
Plus, once a tax assessment is made, the IRS collection statute is typically 10 years.
Keep Good Records
The simple fact is that you could fall within the 6 year audit statue pretty easily. An audit can involve targeted questions and requests of proof of particular items only. But audits can also be very broad, asking for proof of every line item in your tax report. For this reason, it’s very valuable to know how far back you may need to prover your income, expenses, mileage logs, etc… (A good mileage logging system will keep your logs forever, which simplifies your mileage records)
A 6 year record period is usually the worst statute that most people could face, but you should keep copies of your old tax returns forever. After a time (many people say seven years) you should be able to throw out records and receipts.
But some records like improvements to your property that are considered in the amount you’ve invested into a property, should be kept. If you remodel your kitchen and sell your house 20 years later, the receipts for your remodeling job are still relevant to your tax return and can save you on taxes and help avoid potential penalties!