A letter from the IRS asking about a return you filed five years ago is enough to wreck anyone’s weekend. The first question most people ask is whether the agency is even allowed to look that far back. The answer depends entirely on what was on the original return, whether it got filed at all, and whether the omissions on it were the kind that buy the IRS more time. At Tax Crunch, we get this question from clients across the Bay Area almost every week, and the rules are more flexible for the IRS than most filers realize.
The General Rule: Three Years
The default statute of limitations on a federal income tax audit is three years. The clock starts on the later of the original due date of the return or the date the return was actually filed. A 2022 return filed on April 15, 2023 runs out of the audit window on April 15, 2026.
Filing early does not buy you an earlier start. A return submitted in February of any given year is still treated as filed on the April due date for purposes of the statute. Filing late, on the other hand, pushes the clock back. A return filed in October under an extension does not reach the three-year mark until October three years out.
Most audits that happen at all happen inside this three-year window. The IRS knows the rules and tends to move on returns while it still has the easiest path.
When the IRS Gets Six Years
The window doubles when the return understates gross income by more than 25 percent. This is the substantial-omission rule under IRC ยง 6501(e), and it catches more taxpayers than you might expect.
A 2015 amendment expanded the rule to include overstated basis on the sale of property. If you sold a rental and reported the cost basis high enough that your gain came in 25 percent or more below what it should have been, the IRS now has six years to take a closer look. That change matters for anyone selling appreciated real estate, employer stock, or a long-held position where the basis records are incomplete.
The six-year window also applies to unreported foreign income above $5,000, which is increasingly relevant given the IRS’s ongoing focus on offshore accounts, Form 8938, and FBAR compliance.
The Unlimited Lookback Window
Three situations remove the statute of limitations entirely:
- A return that was never filed
- A return that was filed fraudulently
- A willful attempt to evade tax
If any of these apply to a given year, the IRS can come back ten, fifteen, or twenty years later and still assess. A client who skipped filing in 2009 because the business lost money and never circled back is still legally on the hook for that year today. Once a return is filed, the standard clock starts running, which is one reason we sometimes recommend filing late returns voluntarily to close that window, even when the tax owed is zero.
How California’s Franchise Tax Board Differs
California operates on its own schedule. The Franchise Tax Board has a four-year statute of limitations on most returns, a full year longer than the federal default. When the IRS adjusts a federal return, California law requires the taxpayer to notify the FTB within six months, and the FTB then has its own period to assess based on the federal change.
For Bay Area filers, this means a closed federal year is not always a closed state year. Clients with stock option income, rental real estate, or multi-state activity see the gap between federal and state windows surface fairly often.
How Long to Hold On to Records
Pegging your records retention to the three-year rule is the most common mistake we see. The safer rule of thumb:
- Three years for routine returns with no unusual items
- Seven years if there is any chance of a substantial omission, business losses, or a worthless security claim
- Indefinitely for anything that establishes basis, including real estate purchase records, capital improvements, employer stock acquisitions, and inherited property valuations
Basis records do not have an expiration date. The year you eventually sell, those documents become the only thing standing between you and a tax bill calculated on a zero-basis assumption.
What Tax Crunch Recommends If a Notice Arrives
Once an audit notice shows up, the calendar matters more than almost anything else. Response deadlines are short, and a missed one can turn a routine document request into a default assessment. Tax Crunch represents clients before the IRS and the FTB and can review the notice, confirm which lookback window applies, and identify whether the issue is likely contained to one year or apt to spread to others. If you’d like a candid read on where you stand before responding, scheduling a short consultation is the right first step.