The common belief is that the IRS can only go back three years for audit. But there are circumstances when the IRS can go back more than three years to seek taxes. If more than 25% of gross income is omitted from a return, then the Service has six years to assess the tax, unless the filer disclosed the omission on the return.
Here, an S corporation understated its gross receipts on Form 1120S by over $800,000 for each of three years. As a result, its sole owner underreported income from the firm on Schedule E of his Form 1040 by the same amounts.
The IRS sent out deficiency notices after the usual three-year limitation period but before the end of the six-year period. The gross receipts omission wasn’t adequately disclosed on the S corporation’s 1120S or the owner’s individual return, according to the Tax Court says
Manashi, TC Memo. 2018-106