How far back can the IRS audit you?

By Ray Martin,

Have you ever filed a tax return and wondered how long you should keep it, just in case the IRS decides to audit it? Maybe that question came to you after taking a questionable position on a return. As unpleasant as an audit might be, take comfort in the laws that set time limits on IRS audits.

Under the Internal Revenue Code, Section 6501 provides a three-year statute of limitations on tax audits.

It’s important to note that filing a tax return on extension has the downside of also extending the time your return is subject to an audit. So, if you filed your 2011 tax return on April 15, 2012, the IRS had until April 15, 2015, to audit it. However, if you had requested an automatic extension and filed Oct. 15, 2012, the IRS still has until Oct. 15, 2015, to audit your return and assess any additional tax and penalties due.

Section 6501 also sets forth a second statute of limitations. The three-year limit is doubled to six years if the IRS finds that a taxpayer omits from gross income an amount that exceeds 25 percent of the stated gross income. In that case, the IRS could audit your 2011 as late as 2017. Underreported income can happen for a variety of legitimate reasons. For example, overestimating your cost basis for calculating the gain on the sale of property or securities held for a long time is very common.

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