A federal audit is, not surprisingly, an unwelcome event for most taxpayers. An audit is stressful and may result in a taxpayer owing additional money to the Internal Revenue Service (IRS). One question that many taxpayers have concerning federal audits is how long the IRS can take before auditing a tax return after that return has been filed. While the common perception that the statute of limitations on IRS tax audits is three years, the fact is that there are plenty of instances where the IRS can take much longer than that to audit one’s return. Below is a brief overview of the statute of limitations on tax audits in certain situations.
The Three-Year Rule
The traditional primary statute of limitation on how much time the IRS can take to audit a tax return is still three years. However, exceptions to the three-year rule have grown more prevalent recently and there are now plenty of instances where the IRS could take six years or longer to begin an audit.
For example, omitting more than 25 percent of one’s ” reported gross income” gives the IRS six years to begin an audit. Congress, overruling a previous Supreme Court decision, has allowed the IRS to interpret overstating one’s basis as being the same as omitting income, meaning that the IRS is able to apply a fairly broad interpretation to what counts as “omitted” income. This expanded power means that the IRS can take up to six years to audit a tax return in far more cases.
There are plenty of instances where the IRS can go back even further than six years to audit an individual or business. For example, in cases involving criminal violations, fraud or unfiled tax returns there is no statute of limitations. Also, if certain tax forms were omitted from a return then again the IRS’ auditors may not be subject to any time limits for looking at one’s return.
Of course, omitting a form or making an error on one’s tax return is a very easy mistake to make. Knowing that such mistakes could lead to an audit many years after a tax return was filed should serve as a reminder of just how far the reach of the IRS really is.
Keeping good records is imperative when dealing with a potential audit, but just as important for taxpayers is having somebody represent them in negotiations with the IRS. A federal audit is a stressful and often confusing process. An experienced tax attorney can help those who are being audited understand what options they may have and possibly help them minimize the impact an audit may have on their finances.