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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 generally expected to file an individual income tax return each year that you have income. If your income is low enough, you might not be required to file an individual income tax return. However, it is generally a good idea to file an individual income tax return each year that you have income or credits to report, even if a return is not required. Corporate returns, such as Form 1120 and Form 1120-S, should be filed every year, regardless of income or expenses. Partnerships are required to file a Form 1065 tax return for each year that the partnership has income, expenses or credits, although it may be beneficial for the partnership to file a tax return even in years with no income. 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.

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 network 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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