The IRS generally will look at returns filed during the last three years during a tax audit. The Assessment Statute Expiration Date (ASED) places a limit for the time period the IRS has to make a tax assessment. The ASED is three years from the day the return was filed, but there are a number of exceptions to this three-year limit.
How Failing to File Affects a Tax Audit
If you do not file a tax return, the IRS has an unlimited amount of time to assess the tax. The IRS usually does not look back more than six years, but they can if they choose to. Once you file a delinquent return, the three-year ASED begins to run.
Other Situations With Extended Tax Assessment Periods
If you omit more than 25% of gross income, the IRS has six years to audit your return. Congress extended this rule to cover situations where a taxpayer overstates their basis, resulting in an understatement of income of more than 25%.
The IRS also has an unlimited amount of time to assess tax if you have committed tax fraud, including filing a fraudulent return or attempting to evade tax. Again, the IRS typically does not go back more than six years. If the IRS is investigating you for tax fraud, talk to a criminal tax attorney immediately.
Extending the Statute of Limitations for Tax Assessment
There is another way the IRS can extend the ASED: by getting your permission. The IRS will sometimes ask you to extend the statute of limitations during an audit. They may point out that this gives you more time to provide supporting documentation or file an appeal.
However, there may be other factors that weigh against extending the statute of limitations. You can also negotiate the terms of the extension. If you do not agree to the extension, the IRS will typically try to assess any tax they determine to be due.
Whether or not you should extend the assessment period will depend on the unique facts of your case. You may be able to preserve your right to appeal without extending the assessment period.
Talk to your tax attorney about whether or not you should extend the IRS assessment period or attempt to negotiate the terms of the extension.