Q: After what period is my federal tax return safe from audit?

A: Generally, the time frame within which the IRS can examine a federal tax return you have filed is three years. To be more specific, Code Sec. 6501 states that the IRS has three years from the later of the deadline for filing the return (usually April 15th for individuals and sole proprietorships but April 17 for 2006 returns) or date you actually filed the return. This means that if you file your return on May 10, 2007, the IRS will have until May 10, 2010 to look at it and "assess a deficiency;" not April 17, 2010.

There are exceptions and caveats to this general principle, however. If you file prior to April 15 (or April 17 in 2007), the IRS still has until April 15 (April 17 if filed in 2007) of the third year that follows to audit your return. This means that if you filed an income tax return on February 10, 2004, you still won't be out-of-the-woods until April 15, 2007. For taxpayers who file fraudulent returns, incorrect returns with the intent to evade tax, and those who do not file at all, the IRS may open an audit at any time.

(Don't confuse the deadline for IRS tax assessments with your right to file a refund claim for an amount that you overpaid, either on a filed return or through withholding or estimated tax payments. That deadline is the later of three years from the filing deadline or two years from your last tax payment.)

You may also find some comfort in the practical IRS audit-cycle rhythm. While you are never truly beyond an audit until the statute of limitations has properly run, there are some general standards to keep in mind. Office audits are usually done within 1 1/2 years of the time the return was filed, and field office audits are complete by 2 1/2 years. The rule of thumb is that if you haven't been contacted within this time frame, you're probably not going to be. Especially for small businesses, the IRS has promised to shorten its normal audit cycle so that those taxpayers are not "left hanging" on potential tax liabilities (with interest and penalties) until the three-year limitations period has expired. Whether this shortened period happens, however, is still open to speculation. Most businesses should continue to make it a practice to keep "tax reserves" to cover such audit liabilities.