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How Far Back Can the IRS Go When Auditing Your Business?

Tax filings and payment deadlines can be stressful for small business owners. The prospect of an IRS audit can certainly add to that stress. With the IRS set to increase audits of businesses this year, there is a chance that your returns will be among those selected for further review. Now is a good time to think about getting your records organized should the IRS audit your business. Doing so will not only benefit your business, but it may also provide you with peace of mind. Here are some answers to frequently asked questions about how far back the IRS can go when auditing your business records and returns.

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How far back can the IRS go when auditing your business?

Initially, the IRS can audit your returns from any or all of the most recent three tax years. In the event an auditor discovers substantial errors or issues which lead them to believe there may be reason to look further, they may add additional years to the audit’s scope. Generally, the IRS is not likely to look back more than six years when auditing your business, unless it suspects tax fraud or there is a complete failure to file tax returns.

How far back can the IRS go for unfiled taxes?

You are expected to file taxes each year you earn at least $400 in self-employment income, regardless of whether you think you owe taxes on your earnings. It is important to file timely returns; failing to do so could mean forfeiting any tax refunds you are entitled to. The legal time limit for requesting a refund, in most situations, is three years.

In addition, if you owe taxes but do not file or pay when due, the unpaid amount will grow, thanks to late filing penalties (failure to file or failure to pay penalties) and interest calculated from the date the payment was due – including interest on any applicable tax penalties. If you do not file a return, the IRS might ultimately file a substitute tax return and send a notice of what you owe.

While the legal time limit for taxpayers to file a request for a refund is generally three years, the IRS time limit for assessing and collecting taxes owed does not begin until you have filed your tax return. So, if you have not filed a return for a prior tax year, there is, in theory, no limit to how far back the IRS can go when auditing your business to determine the amount you owe and initiate collection actions if you do not pay.

What happens if I don’t owe taxes and don’t file?

The tax filing and tax payment requirements are actually separate obligations. In most cases, small business owners must file tax returns each year – regardless of whether they ultimately owe taxes to the IRS. While the threshold for non-self-employed individuals is the standard deduction amount ($12,400 for single taxpayers for the 2020 tax year), self-employed persons are subject to a much lower filing threshold, at just $400 of income. If you earned more than $400 for the tax year and failed to file a tax return, the IRS may assess a tax penalty. 

Does the IRS forgive tax debt after 10 years?

The IRS can forgive tax debt, and sometimes enters into “Offer in Compromise” agreements with taxpayers who are experiencing significant financial hardship and are truly unable to pay their taxes. Such forgiveness, however, is not common.

That said, the legal time limit within which the IRS has to collect tax debt is 10 years from the date taxes are assessed. In theory, this means that any amount the IRS cannot collect through payment or tax liens within that 10-year period are, in effect, forgiven. However, there are exceptions, waivers, and extensions that can complicate calculating the 10-year expiration date. Business owners should consult with a tax attorney if they have questions or concerns about tax debt or are unable to pay the taxes they owe.

Can the IRS keep your stimulus check?

Because they were designed to stimulate the economy, the economic impact stimulus payments, which most taxpayers received in three separate payments in 2020 and early 2021, included certain protections. Individuals and small business owners who owe back taxes to the IRS or state tax authorities do not need to worry about their stimulus payments being seized to repay those taxes.

However, because the legislation authorizing the third stimulus payment was passed through the budget reconciliation process to get it signed into law quickly, the payments are not protected from all types of garnishment. Specifically, if you have unpaid private debt, such as consumer debt in default or debt related to a civil judgment, you may receive less than the full amount of stimulus you are otherwise entitled to.

Get Organized and Be Prepared Should the IRS Audit Your Business

Small business owners should not live in fear of being audited, but should seek to maintain organized, detailed records of revenues and expenses, including tax-related documents and records. In the event you receive a notice that the IRS wants to audit your returns, being able to easily retrieve the required documentation will provide peace of mind.

To get help understanding your tax filing obligations, payment requirements, interpreting an IRS request letter, or for any other tax-related matter, reach out to a Rocket Lawyer On Call® attorney for affordable legal advice.

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.

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