When the IRS Wants More Than Six Years of Returns

Most non-filers who come forward file six years and are done with the back years. That is how the IRS's own policy is designed to work. But some people get a letter, or a visit from a Revenue Officer, asking for eight, ten, or more years.

That is not the IRS breaking its own rules. The rule has an exception written into it. If you understand the exception, you can usually see it coming.

The exception is in the same sentence as the rule

Policy Statement 5-133, found at IRM 1.2.1.6.18, says that "normally" enforcement will cover "not more than six (6) years." The very next sentence says: "Enforcement beyond such period will not be undertaken without prior managerial approval."

So the IRS can go beyond six years. What it cannot do is have a single employee decide to do it alone. The examination manual, IRM 4.12.1.3.1, requires the examiner to document the facts of the case and the reasons for the longer period on Lead Sheet 200, Multi-year and Related Returns, and to get management approval for any deviation from the policy.

The legal backdrop: old unfiled years never closed

The reason the IRS can do this at all is IRC 6501(c)(3). When a return is not filed, the tax "may be assessed... at any time." The three-year assessment period in IRC 6501(a) only begins when a return is filed. A substitute for return prepared by the IRS does not start that period either, under IRC 6501(b)(3).

So a year you skipped in 2010 is still legally open today. The six-year policy is what normally keeps the IRS from pursuing it. When the policy's exception applies, the legal door is still unlocked. For more on that, see why there is no clock on a year you never filed.

The factors that push the IRS past six years

The policy lists the factors the IRS weighs. Each one tells you something about your risk.

Prior history of noncompliance

A taxpayer who missed two years during a divorce looks very different from a taxpayer who has not filed in fifteen years, or who has a pattern of filing only when caught. A long history is the most common reason enforcement reaches further back.

Income from illegal sources

The policy lists this factor by name. Illegal-source income also raises the fraud question immediately, which changes how the whole case is handled.

Effect upon voluntary compliance

The IRS considers whether going easy on a particular taxpayer would send the wrong message. High-visibility taxpayers and taxpayers in industries the IRS is focused on may see broader enforcement.

Anticipated revenue and collectibility

If the older years involve a lot of tax and the taxpayer has assets, the math changes. The policy weighs anticipated revenue against the time and effort required to determine the tax due. Large dollars and collectible assets push toward more years.

Special circumstances

The policy leaves room for facts peculiar to the taxpayer, the industry, or the type of tax. This is a catch-all, and it gives the IRS discretion.

High-income non-filers

The IRS runs a specific program for High Income Non-Filers. The examination manual, IRM 4.12.1.23, describes HINF cases as carrying their own source code and project codes, including cases identified by a risk-based model and cases identified by referral. The same section tells examiners how to expand a non-filer examination to include "nonfiled prior and/or subsequent year returns."

If your income in the missing years was significant, assume you are more visible to the IRS than you would like, and assume the scope could go beyond the minimum.

Where fraud screening comes in

Here is the part most people miss. The factors that justify reaching beyond six years overlap heavily with the factors the IRS uses to screen for fraud.

IRM 25.1.7.2 lists potential fraud indicators for non-filers, including:

• A history of non-filing or late filing combined with an apparent ability to pay
• Knowledge of the filing requirements, such as a record of previous filing or business experience
• Failure to reveal or attempts to conceal income or assets
• Large numbers of cash transactions
• Significant income shown on information returns
• Refusal or inability to explain the failure to file

The manual notes that a history of non-filing with an apparent ability to pay is not enough on its own to support the fraudulent failure to file penalty, and should be cited together with other indicators. Still, if you are in a case where the IRS wants more than six years, you are in a case where someone is likely asking the fraud questions too. That changes how you should respond. Read fraud indicators in non-filer cases before you talk to anyone at the IRS.

How the request usually arrives

In an examination, the request typically comes from the examiner assigned to the case after the initial contact and interview. In collection, it comes from a Revenue Officer working a delinquent return investigation under IRM 5.1.11. Either way, the request should identify the periods by tax year. If the letter is vague, or the employee asks by phone for "everything you haven't filed," get the periods in writing. You cannot plan a response to a moving target, and you should not guess at the scope of a federal request.

Remember too that the scope can change as the case develops. An examiner who opens a case for the most recent years can expand it to prior and subsequent years under the procedures in IRM 4.12.1.23. A clean, prompt, accurate response to the first request is often the best way to keep the scope from growing.

What to do if the IRS asks for more than six

1. Read the request carefully. Identify every period listed. Do not assume the letter means six years if it names more.
2. Do not volunteer explanations by phone. The examination manual asks for a written statement of why you did not file. That statement is evidence. Have it prepared with counsel.
3. Get your transcripts. Wage and income transcripts go back for the current and nine prior tax years. For anything older, you will be rebuilding records from other sources.
4. Assess the fraud question honestly. If there is cash income, unreported accounts, or anything you would not want to explain, stop and get legal advice before filing anything.
5. Ask about scope through a representative. The IRS employee needed managerial approval to go beyond six years. A representative can ask what facts supported that decision and whether the scope fits the case.
6. Build accurate returns. Older years are harder to document. Accuracy matters more than speed when the IRS is already looking closely. See reconstructing income without records.

What not to do

Do not file inflated deductions on old years because the records are gone and you figure the IRS can't check. Filing a return you know is false is a separate crime under IRC 7206(1), and it turns a filing problem into a fraud problem. A late, accurate return is always better than a fast, wrong one.

Do not ignore the request. If you do not file, the examiner will decide the scope under Policy Statement 5-133 and prepare substitute returns (IRM 4.12.1.8). Substitute returns use your reported income and give you almost nothing on the deduction side.

The bottom line

The six-year rule is real, but it was never a promise. When the IRS reaches further back, it is applying the same policy, using factors it wrote down decades ago. Those factors tell you how the IRS sees your case. If you are in that group, you need a plan before you need a return.