As a business owner, you work hard to maintain compliance and file accurate tax returns. But how long does the IRS have to send a notice after you file? Knowing the IRS statute of limitations is important. It helps you manage risk, keep accurate records, and stay ready for audits (if they ever arise).
In this guide, we’ll explain how long the IRS can audit your business, the exceptions to the three-year rule, and best practices for protecting yourself from tax-related risks.
Why Is the IRS Statute of Limitations Important for Business Owners?
The IRS statute of limitations sets a time limit for the IRS. This limit tells how long they have to audit a tax return. It also shows how long they can assess extra taxes or send a notice of deficiency. This means that after a certain period, the IRS can no longer legally challenge your business’s tax filings.
For business owners, knowing these time limits helps:
- Ensure proper recordkeeping – Keep supporting documents for the correct number of years.
- Understand audit risks – Identify when a tax year is officially “closed.”
- Minimize tax exposure – Knowing when an IRS review is still possible allows you to prepare proactively.
Let’s break down the IRS’s standard three-year rule and the key exceptions that business owners should be aware of.
What Is the IRS Statute of Limitations?
The IRS generally has three years from the later of:
- The date the tax return was filed, OR
- The original due date of the return.
Example:
If your business files its 2024 tax return on March 1, 2025 but the official due date is April 15, 2025, the IRS statute of limitations ends on April 15, 2028. This is three years from the later of the two dates.
If you file an extension or file your return late, the three-year countdown begins on the date of actual filing.
Exceptions to the Three-Year Rule
The standard IRS statute of limitations is three years. However, there are exceptions that can extend the IRS's ability to audit a business.
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Substantial Underreporting
If 15% or less of your income is reported on your tax return, the statute of limitations extends to six years. The IRS takes underreporting seriously, particularly for businesses with significant revenue fluctuations.
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Not Filing a Tax Return
If your business fails to file a tax return, the IRS statute of limitations never expires. This means the IRS can audit or assess tax at any time, even decades later.
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Fraudulent Returns
If the IRS suspects fraud, there is no time limit for an audit. Fraud includes intentionally falsifying numbers, hiding income, or fabricating deductions.
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Foreign Income Reporting
If your business earns money from abroad and omits more than $5,000, the IRS can extend the time limit for audits. This extension can last from three to six years. This applies to foreign bank accounts, foreign partnerships, or offshore business activities.
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IRS-Requested Changes
If the IRS audits a past tax year and suggests changes, they may request an extension for the time limit for related tax filings.
How Long Should Businesses Keep Tax Records?
To ensure compliance and be ready in the (rare) case of an audit, businesses should maintain tax records for the appropriate time frame.
Best Practices for Business Tax Recordkeeping:
- Keep business tax returns for at least six years, especially if revenue fluctuates.
- Store payroll tax records for four years (IRS and state employment tax laws vary).
- Maintain receipts, invoices, and documentation for deductions and credits for at least three years in case of an audit.
- Keep corporate documents indefinitely, including entity formation records and stock records.
Proper tax recordkeeping ensures your tax preparer or bookkeeper has visibility into past filings, reducing errors and providing protection in case of an IRS review.
Does Filing an Extension Increase Audit Risk?
A common misconception is that filing an extension increases audit risk. This is not true!
Facts About Business Tax Extensions:
- Extensions do not trigger an audit—they simply give businesses more time to file.
- The statute of limitations starts when you file. An extension gives the IRS more time to audit. However, it does not increase the chances of an audit.
- Timely filing, even with an extension, helps minimize penalties and interest.
If your business needs more time to gather accurate financials, filing an extension is a smart tax strategy rather than rushing a return that may contain errors.
How Can Business Owners Reduce Audit Risk?
The best way to avoid IRS issues is to stay proactive with tax compliance. Here are the most effective strategies:
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File Taxes Accurately and On Time
- Even if you need an extension, file timely payments to avoid IRS scrutiny.
- Payments are due by the original filing date of your tax return, excluding extensions.
- Ensure your tax return matches your financial records—discrepancies can trigger an audit.
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Keep Meticulous Financial Records
- Work with a reputable tax professional or accountant to ensure proper documentation.
- Use accounting software or a cloud-based system to store receipts, invoices, and payroll data.
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Be Cautious with Deductions
- Claiming excessive or questionable deductions increases audit risk.
- Ensure all business expenses are legitimate and well-documented.
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Work with an Experienced Tax Professional
Not all tax professionals specialize in business audits and IRS disputes. If the IRS audits you, working with a tax professional who understands audit defense is crucial.
At LedgerFi, we have a team experienced in handling compliance strategies. Many tax preparers focus on standard tax filings, but we ensure businesses are fully prepared to handle IRS inquiries, statute limitations, and risk management.
Conclusion: How to Stay Audit-Ready
Understanding the IRS statute of limitations can help businesses mitigate risk, maintain accurate records, and avoid unnecessary stress.
Key Takeaways:
- The IRS typically has three years to audit or assess additional tax.
- Exceptions apply for underreporting, fraud, foreign income, and missing returns.
- Maintaining good financial records is essential for IRS compliance.
- Extensions do not increase audit risk—they give businesses more time to file accurately.
- An experienced tax professional helps businesses stay protected.
To ensure your business is IRS-compliant, audit-ready, and tax-efficient, contact LedgerFi today. Our team specializes in business tax planning and recordkeeping so you can focus on running your business with confidence.
Schedule a consultation today to safeguard your business from IRS risks.
