The Internal Revenue Service may generally audit a return no more than six years after it was first filed. In most cases, the IRS will try to audit all returns no more than two years after they are filed. While the statute of limitations is three years in most cases, the IRS can go back up to six years if it finds a substantial error on a tax return.
It is important to note that there is no standard definition of what a substantial error may be. Therefore, individual taxpayers are advised to keep records for at least three years after filing a return. Payroll records should be kept for up to six years while records relating to an asset should be kept for three years after the asset has been sold.
In the event that the statute of limitations is set to expire prior to a decision being made regarding an audit, the taxpayer may be asked to extend the statute of limitations. Although the taxpayer does not need to agree to this, it will require an examiner to make a decision based on information available at the time. This may cause a taxpayer to owe more taxes or miss a refund that may have been owed at the conclusion of the examination.
If the IRS sends an audit notice to a taxpayer, that taxpayer may want to consider hiring a tax attorney. A tax attorney may be able to negotiate with the IRS to reduce the amount owed as well as reduce any penalties or interest that may be owed. In addition, it may be possible to negotiate a payment plan that may resolve the case to the satisfaction of all parties. If necessary, a tax attorney may represent an individual in tax court.
Source: IRS, “How far back can the IRS go to audit my return?”, December 09, 2014