When the IRS Goes Back 20 Years: Why Business Owners Need an Experienced IRS Audit Attorney
The Reality of Extended IRS Audits
Many business owners believe the IRS can only look back three years. Some prepare more carefully and keep records for seven years. Both assumptions can leave you exposed. When tax attributes like net operating losses (NOLs) are involved, the IRS has authority to extend its review far beyond the typical three-year window.
John Milikowsky, Founder of Milikowsky Tax Law, recounts a recent case that illustrates just how far back the IRS can review your tax returns:
“Most people think that the IRS can only go back three years, and most people only keep records for seven years. We have a story that’s legitimate where the IRS went back 20 years.”
A San Diego Manufacturer’s 20-Year IRS Audit
Two decades ago, a San Diego manufacturing company faced devastating losses. With $18 million in sales erased by a competitor’s market advantage, the company collapsed to nearly zero revenue. They were forced to borrow from hedge funds, foreign entities, and local investors to stay afloat.
Over time, the business generated revenue, rebounded and became profitable again. The $30 million in losses from their downturn had been carried forward year after year, offsetting taxable income.
When the company’s profits eventually returned, those prior losses eliminated their tax liability. That is when the IRS took notice.
“The moment the IRS sees that you’re earning lots of money and you have a write-off that zeroes out your income taxes, they’re going to audit you. Not a guarantee, but it’s a high likelihood.”
Why the IRS Can Look Back So Far in An Audit
Net operating losses (NOLs) are legitimate tax tools, but they also trigger scrutiny. The IRS requires confirmation that the original losses were accurate. That means examining:
- The originating year of the loss
- Each year the loss was carried forward
- The final year when those losses offset taxable income
For this manufacturer, that meant the IRS traced every return across 20 years of records. To validate those losses, the IRS had to determine whether income was underreported or whether expenses were overstated. Once an audit begins, the Service can follow that thread back to its very start.
What Business Owners Need to Understand About IRS Audits
If you are a business owner who receives an IRS audit letter, you cannot assume the inquiry will be limited to the last three years. The IRS has the authority to:
- Revisit older years when losses or credits are involved
- Request documentation from decades prior
- Question the validity of carried-forward tax attributes
This reality can be daunting for any business owner, particularly if records are incomplete or financial leadership has changed over time. Without proper representation, the process can expose your company to unnecessary risk.
Why Legal Representation in IRS Audits Matters
At Milikowsky Tax Law, we have represented hundreds of business owners in audits with the IRS, EDD, CDFTA, and other government agencies. Our focus is not just on defending a single tax year it’s on preserving the future of your business.
We know how to navigate:
- IRS and state tax audits
- Sales tax and payroll tax disputes
- SBA PPP forgiveness denials and EIDL audits
- Complex government tax controversies
At Milikowsky Tax Law our mission is clear: We keep businesses in business.
When the IRS sends an audit letter, time is not on your side. With the right legal strategy, however, you can protect your company’s financial future no matter how many years the IRS wants to review.
Contact Milikowsky Tax Law today to discuss your audit case.
FAQ for Business Owners
How far back can the IRS audit my business?
In most cases, three years. However, when there are substantial errors, fraud, or net operating losses, the IRS can review much older returns.
What is a net operating loss (NOL)?
A loss in one tax year that can be carried forward to reduce taxable income in future years. NOLs often trigger deeper IRS review.
Why should I call a tax attorney instead of my CPA?
Your CPA prepares your return, but only a tax attorney is equipped to defend your business in legal proceedings with the IRS.
