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If you’ve ever wondered how far back the IRS can audit you, you’re not alone. Many small business owners are unfamiliar with the IRS audit statute of limitations and assume they must retain decades of tax documents just to be safe. However, once you better understand the tax audit time limit, you can spend less time dealing with old documents and shift your focus to more urgent business needs. The question of how far back the IRS can audit your business is a legitimate concern. Let's dive into some background information on audit triggers and the statute of limitations that can provide the necessary answers.

What is an IRS audit?

Small business audits are notices from the IRS which state that your business' finances need further review to verify that they have been reported correctly. If you receive an IRS business audit notice, your first thought might be that you will be penalized and have to pay a considerable fine. This isn't necessarily true, so avoid jumping to the worst-case scenario. 

According to the IRS audits page, being selected for an audit doesn’t automatically mean there’s a problem. Sometimes it’s just a random selection! An audit will be conducted either by mail or an in-person interview, and consulting with an expert who handles tax audit defense can be a significant first step after you receive the notice.

What can trigger IRS audit?

While some business tax audits are random, others can be triggered by a few common taxpayer activities. Some of these IRS audit triggers are related to errors, such as inputting data incorrectly or a simple miscalculation. Partnering with a small business tax advisory firm can help prevent some of these user errors and potentially avoid an audit.

The IRS can also issue audits for activities that might otherwise seem suspicious or unusual. You may have made a large donation to a charity that doesn't seem proportionate to your reported income, or your employees are receiving unusually high compensation. Any of these activities could be flagged by the IRS and trigger a business tax audit.

How far back can the IRS audit a business?

Now that you’re familiar with the basics of what triggers an IRS business audit let's explore more about The IRS audit statute of limitations. As you file your tax returns and organize your documents, you’ll probably want to know, “How far back can the IRS audit a business?" The general rule is three years, but the IRS states they can look back further if they find a substantial error. 

Statute of Limitations for IRS Audits: The general 3-year rule

The IRS will usually audit tax forms soon after they’re filed, which will be those that were completed over the previous two years. The statute of limitations on the time to assess additional tax is generally three years after the return was due or filed, whichever was later. 

The phrasing of this statute of limitations can get confusing, so let's look at an example of the three-year rule. Imagine that you filed your 2022 tax return in March 2023. The statute of limitations would begin on tax day of 2023, giving the IRS authority to audit your taxes through April 2026. 

Are there exceptions to the general rule?

In short, the IRS can look back a little further in some circumstances. An omission of more than 25% of your gross income enables the IRS to assess six years of your tax returns. Taxpayers who intentionally try to evade tax with a false or fraudulent tax return are subject to even more scrutiny, as there's no limit on how far back the IRS can audit a business. Tax evasion can have serious consequences, so falsifying documents is never good. 

How can you prepare for an IRS audit?

Of course, no one wants to deal with an IRS small business audit, but preparing for one now will save you a lot of headaches if you receive a notice. Here are a few tips that can help you prepare:

  • Prioritize recordkeeping - Receiving an IRS audit notice means collecting various tax documents from at least the past three years. Your business has a lot of records beyond tax refunds, so it's essential to maintain a process of accurate and thorough recordkeeping.
  • Understand your rights - Read through the Taxpayer Bill of Rights to better understand your options should you receive an IRS audit notice. This should help take some of the pressure off the situation and give you a clear mind so you can confidently move forward in the audit process.
  • Consider an audit expert - The language found in an audit notice might be confusing if you're not a tax professional, so you may consider an audit defense expert who can walk you through the details. Having someone on your side can give you peace of mind, especially if you’re in a challenging situation, such as auditing without receipts.

    • Small Business Audit FAQs

  • How long should you save business records? Since the IRS will generally look back a maximum of six years, it’s a best practice to save your business records for the same length of time. 
  • How can you avoid an IRS audit? There's no guaranteed way to avoid an audit. Still, certain practices like keeping good records and working with a small business tax advisory firm can help reduce the likelihood of receiving an audit notice.
  • How many years in a row can the IRS audit you? Unfortunately, there's no limit on how many years in a row you can receive an IRS audit notice. Contact a tax professional before or during your first audit in case you receive another notice down the line. 
  • Can the IRS audit you after 10 years? Although unlikely, the IRS can audit after 10 years in cases where an individual has filed a fraudulent or false tax return.

    • Let us protect your business with our expert audit defense services

    In most situations, the IRS will only go back three years when auditing your tax returns. A substantial error or cases of fraud can extend this statute of limitations to six years or indefinitely, but many small business owners can just refer to the three-year rule. The tax professionals at 1-800Accountant are here to support small business owners in all areas of accounting, bookkeeping, and tax services. If you have additional questions or concerns about how to prepare for an audit, please contact us today to speak with an expert.

    This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.