Understanding IRS Statutes of Limitations: How Long Do You Have to Worry? (2024)

The short answer is…not forever…err sometimes forever?

It’s 5:00pm on April 15 and you’re excited!

You filed your taxes for the year and there’s a sense of relief…at least at first because you wake up at 3:00am and start ruminating. You think you may have overlooked income you received last year or that you really stretched on taking what, now that you think about it, might be an unjustified deduction.

Oh, and there are some past returns you never submitted.

It was years ago, though.

Can the IRS still come looking for those to be filed?!?!

Now you can’t fall back asleep and you're reaching for the Ambien that’s only supposed to be for emergencies.

You’re freaking out because now you've convinced yourself that you'll surely be hearing from the IRS soon.

But wait, just how long DOES the IRS have to come back and penalize you for mistakes you made years ago?

The answer is simple!

It’s three years, or six years, or ten years, or sometimes indefinitely.

Knowing How Long the IRS Can Look Back and Penalize You is Critical Because it’s Different Depending on the Issue

The IRS absolutely has a time limit for how far back they can be digging around to try and bring the hammer down on unsuspecting taxpayers.

This is called the statute of limitations (the “SOL”).

The SOL is the time period the IRS has to challenge your tax filings or collect on unpaid tax debt.

These time limits protect you from perpetual worry, but the SOL’s are not all the same.

Understanding SOLs can help you mitigate potential risks and strategize, which is especially crucial if you have complicated finances

In this week’s edition of Resolving Tax Debt, we’ll cover four key points regarding IRS statutes of limitations to provide you with clarity and insight to help you stay ahead of the seemingly always lurking IRS.

The Statutes of Limitation

1. Three-Years

The most common timeframe you have to worry about when it comes to the IRS is the three-year window they have to audit a just filed tax return. They don't have forever to do it. If it's been three years, you can breathe easy.

Strategic Tip: If you discover an error from within the past three years, don't overthink it; amend the return. Proactively taking care of the issue once you discover it can help minimize the damage down the road.

2. Six-Year Rule for Underreported Income

You know how we just discussed that the IRS is only able to audit returns filed within the past three years?

Well, we lied…kindof.

If you underreport your income by more than 25%, the timeframe for the IRS to challenge your return extends from three years to six years.

For most of the taxpayer’s I’ve represented, if your financial picture is relatively simple, you’re only going to underreport by more than 25% if you’re hiding something but mistakes do happen.

Make sure you’re on top of all income sources you’ve had through the year so this doesn't happen.

On the other hand, if you have complex finances, multiple streams of income, including corporations that own corporations that own corporations, the likelihood of missing something is greater.

Relying on professional guidance from the start is best.

3. Ten-Year Collection Limit

When you haven’t paid your taxes, the IRS has ten years from the date the unpaid taxes are assessed to collect from you.

If ten years pass and you still haven’t paid what's owed, the remaining balance is written off and gone forever!

This ten-year period can be paused and extended, however, under certain situations, which generally include if you file for an Offer in Compromise or if you file for bankruptcy, but make sure you ask someone with expertise about whether whatever you’re doing extends this SOL.

Strategic Tip: If you're approached by the IRS late in the 10 year period, it's crucial to understand your rights and options. Consult with a tax attorney so you don’t end up paying more than you have to.

4. Indefinite Statute of Limitations: Fraud

I hate to say it, but there is an instance where the statute of limitations is infinite: Tax Fraud.

If the IRS suspects you of willfully evading taxes, they can investigate and prosecute you at any time, whether it’s been 5 years or 25 years.

Strategic Tip: Always maintain thorough and honest records. In fraud cases, the quality and integrity of your documentation is your strongest defense.

Records are easier than ever to keep around with thumb drives and cloud computing available.

You don't need to keep 30 years of records in your back room anymore.

TL;DR: Keeping the IRS at Bay

• The IRS has three years to audit most returns.
• The IRS has six years to audit returns where income was underreported by more than 25%.
• The IRS has ten years to collect unpaid tax debts, but that timeframe can be paused and extended if you take certain, specific actions.
• The IRS has FOREVER to investigate and prosecute tax fraud.

Understanding the statutes of limitations can help you sleep at night but also prevent unexpected IRS audits and other tax issues.

Call to Action

You might be worried that the IRS can go back in time to examine your tax returns but knowing that the IRS only has a certain amount of time to do it should also be a relief.

As a tax attorney, I help taxpayers protect against tax issues related to statutes of limitations but I also utilize those same statutes of limitations to ensure clients pay the least amount of tax possible.

I also see a ton of taxpayers who never figure it out and they end up paying the consequences.

Thank you for continuing to support the Resolving Tax Debt weekly newsletter.

Comment below with questions and let me know if you want to get on a call to talk through any tax issues!