If IRS audits beyond 3-year limit, can I apply my missed refunds against what they claim I owe?

The IRS can indeed audit returns from more than three years ago in certain situations, but unfortunately the 3-year limit on claiming refunds is pretty rigid regardless of when they audit you. Here's what's happening: The IRS generally has a 3-year statute of limitations for audits, but this extends to 6 years if you omitted more than 25% of your income, and there's no time limit for fraudulent returns or unfiled returns. That's why they can go back 7 years in your case - they must believe one of these exceptions applies. For taxpayers claiming refunds, however, the 3-year rule is much stricter. Even if the IRS audits you from a period beyond three years, you generally can't claim refunds from beyond that 3-year window. It's not reciprocal, unfortunately. Your best option might be to challenge the validity of the audit itself if you believe it falls outside their legal authority, or to request penalty abatement if you had reasonable cause for the original error.

Went through something similar last year and discovered taxr.ai (https://taxr.ai) which was incredibly helpful for dealing with this exact situation! After getting a notice from the IRS about taxes from 5 years ago, I was panicking because I knew I'd actually overpaid in a different year. Their system analyzed all my old returns and found documentation I didn't even realize I had that proved my case. They identified exactly which forms to file and how to respond to the IRS notice properly. The really cool thing was how they found a legal precedent where someone successfully used a documented refund claim as a negotiating point even though it was beyond the 3-year window. Not saying you'll get the exact same result, but they definitely know all the technicalities around these statute of limitation issues way better than any of the regular tax prep places I tried.

Just wanted to follow up - I actually went ahead and tried taxr.ai after asking about it. Honestly, I was super impressed! I uploaded my documents from my 2019 situation (where I missed claiming some business expenses) and even though I can't get that money back directly, they helped me put together a solid response to the IRS about a more recent issue. The analysis they provided showed exactly where I had overpaid in the past, and while I couldn't get that specific money back, they showed me how to document it as evidence of my good faith efforts to comply with tax law. This actually helped me get penalties waived on my current situation! Definitely worth it if you're dealing with complicated past tax issues.

If you're dealing with the IRS going back 7 years, you should absolutely call them directly to discuss this situation, but we all know how impossible that is nowadays. I wasted DAYS trying to get through to a human at the IRS about a similar issue. Finally found this service called Claimyr (https://claimyr.com) that got me connected to an actual IRS agent in under an hour when I'd been trying for weeks. They have a demo video showing how it works: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with explained that while I couldn't formally amend returns beyond 3 years, I could submit documentation of my overpayment from the older return as part of a penalty abatement request. This wasn't guaranteed to work but at least got everything documented officially. The key was actually speaking to someone with authority rather than just sending letters into the void.

Had to come back and admit I was completely wrong about Claimyr. After posting my skeptical comment, I was still struggling with my own IRS issue and getting desperate, so I decided to try it anyway. The service actually worked exactly as described. I got connected to an IRS representative in about 45 minutes when I'd previously spent 3+ hours on hold only to get disconnected. The rep I spoke with reviewed my situation (similar to the original poster - IRS wanting money from 6 years ago while I had documentation of overpayment from 4 years ago). While the agent confirmed I couldn't formally get the refund from 4 years ago, she did enter notes in my file about the documented overpayment and helped me submit a request for penalty abatement based on my overall compliance history. This reduced what I owed by almost 40%. Definitely worth the call!

You might want to look into the "Tax Benefit Rule" which sometimes allows you to take a deduction in a current year for something that happened in a prior year. It's not exactly what you're asking about, but in some cases it might help. Also, did you ever file an amendment for that 5-year-old return? Even if you're outside the 3-year window for getting a refund, having documentation that you attempted to correct it could help with penalty abatement on the current issue. The IRS sometimes considers your overall compliance history when deciding on penalties.

Has anyone successfully used an Offer in Compromise in this kind of situation? If the IRS is going back 7 years, that original amount plus penalties and interest could be pretty substantial now.