How many years should we be concerned about the possibility of an IRS audit? Most people realize they are in the clear for taxes they filed in the 1990s. The IRS can’t come back and audit you a decade later because audits and additional assessments are time bound by a 3-year statute of limitations. In most cases you are in the clear after 3 years from the time you file or from the due date of the return. However, there is an exception that allows the IRS to double the statutory period in cases where the taxpayer understates gross income by 25% or more. The whole concept of understating income by 25% can be fairly convoluted as evidenced by the wide variations in how appellate courts have decided the question over the years.
But the highest court in the nation has recently sided with the taxpayer in a case that was expected by many to go the other way. It was a tax shelter case. The IRS wanted 6 years, but the Supreme Court ruled that the standard 3-year rule applied. Some see this as a big win for taxpayers. Apparently the circumstances that would allow the IRS to stray from the 3-year rule are fairly narrow.