July 27, 2020

IRS Audit Time Limits | IRS Statute of Limitations Audit | Legacy Tax & Resolution Services

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IRS Audit Time Limits | IRS Statute of Limitations Audit | Legacy Tax & Resolution Services

When Will the IRS Audit You?

Most taxpayers dread the possibility of undergoing an audit by the Internal Revenue Service (IRS). No matter how careful you are, it’s still possible to make a mistake or an error that may result in an IRS audit.

Even if you’re familiar with the audit process, it’s likely that you still have some questions including how far back the IRS can audit. Here is some information to help you understand how far back the IRS can audit you.

Audit Statute of Limitations

As a taxpayer, it’s important to understand that there is a statute of limitations that dictates how long the IRS has to initiate an audit. Generally, the IRS has three years to audit you, and this time period can start from the later of two dates:

1. The due date of your tax return. Most years, this date will be April 15. So, if your tax return was due on April 15, 2016, the IRS would have until April 15, 2019, to initiate an audit.

2. The date you filed your tax return. If you have applied for an extension on your tax return, the audit statute of limitations is also extended. An extension gives an extra six months to file your return, so if you filed your return on Oct. 15, 2015, an audit is possible until Oct. 15, 2018. This allow applies to late filed returns. The statute of limitation would start from the time the return was filed.

Auditing Six Years Later

For most taxpayers, the three-year statute of limitations for audits by the IRS will apply. Unfortunately, there are some circumstances where the three-year time period can be extended to six years, and sometimes longer.

In Section 6501 of the IRS Code, there is a six-year audit statute of limitations that applies in certain circumstances. If the IRS finds that you have substantially underreported your income, this six-year time limit will apply instead of the traditional three years. For this statute of limitations to apply, you would need to understate your taxable income by at least 25%. Intentionally underreporting your taxable income may result in several consequences:

Fines.

Penalties.

Prison sentences.

If you have offshore income, this can also impact how long the IRS has to begin an audit. The IRS will also have a six-year statute of limitations if you have foreign income of more than $5,000 and do not report this income on your tax return. You may also face criminal penalties for not reporting foreign income.

THAT’S WHY YOU NEED TO CALL Legacy Tax & Resolution Services – 855-829-5877

No Statute on Unfiled Return or Fraudulent Return.

The IRS has no time limit if you never file a return or if the IRS can prove civil or criminal fraud. If you file a return, can the IRS ever claim that your return didn’t count so that the statute of limitations never starts to run? The answer is “yes.” Example, if you don’t sign your return, the IRS does not consider it a valid tax return. That means the three years can never start to run.

Another example, if you alter the “penalties of perjury” language at the bottom of the return where you sign, it also can mean that the tax return does not count. Some well-meaning taxpayers forget to sign or may unwittingly change the penalties-of-perjury wording.

Extending the Statute.

The IRS typically must examine a tax return within three years, unless one of the many exceptions discussed above applies, but the IRS does track the three-year statute as its main limitation. Frequently, the IRS says that it needs more time to audit.

The IRS may contact you about two-and-a-half years after you file, asking you to sign a form to extend the statute of limitations. It can be tempting to relish your power and refuse, as some taxpayers do; however, doing so in this context is often a mistake. It usually prompts the IRS to send a notice assessing extra taxes, without taking the time to thoroughly review your explanation of why you do not owe more. The IRS may make unfavorable assumptions. Thus, most tax advisers tell clients to agree to the requested extension.

You may, however, be able to limit the scope of the extension to certain tax issues, or to limit the time (say, an extra year). You should seek Tax Attorney or Certified Tax Resolution Specialist help if you receive such an inquiry.

Amending Tax Returns.

Taxpayers must abide by refund statute time limits, as well. If you want to amend a tax return, you must do it within three years of the original filing date. You might think that amending a tax return would restart the IRS’s three-year audit statute, but it doesn’t.

However, where your amended tax return shows an increase in tax, and when you submit the amended return within 60 days before the three-year statute runs, the IRS has only 60 days after it receives the amended return to make an assessment. This narrow window can present planning opportunities. In contrast, an amended return that does not report a net increase in tax does not trigger an extension of the statute.

Claiming a Refund.

Getting money back from the IRS is difficult. If you pay estimated taxes, or have tax withholding on your paycheck but fail to file a return, you generally have only two years (not three) to try to get it back.

Suppose you make tax payments (by withholding or estimated tax payments), but you have not filed tax returns for five years. When you file those long-past-due returns, you may find that overpayments in one year may not offset underpayments in another. The resulting lost tax money is painful, and it catches many taxpayers unaware.

Other Statute Traps.

Statute-of-limitation issues come up frequently, and the facts can become confusing. As but one example, consider what happens when an IRS notice is sent to a partnership, but not to its individual partners. The audit or tax dispute may be ongoing, but you may have no personal notice of it. You might think that your statute has run and that you are in the clear; however, the partnership tax rules may give the IRS extra time.

Also watch for cases where the statute may be “tolled” (held in abeyance) by an IRS John Doe summons, even though you have no notice of it. A John Doe summons is issued not to taxpayers, but to banks and other third parties who have relationships with taxpayers. You may have no actual notice that the summons was issued. Even so, there is an automatic extension of the statute of limitations in some cases. For example, suppose a promoter has sold you on a tax strategy. The IRS may issue the promoter a summons, asking for all the names of his or her clients and customers. While he or she fights turning those names over, the statute-of-limitations clock for all of those clients (which might include you) is stopped.

Another situation in which the IRS statute is tolled is where the taxpayer is outside the United States. If you flee the country for years and return, you may find that your tax problems can spring back to life. You might also be living and working outside the United States and have no knowledge that the IRS has a claim against you. Even then, your statute of limitations is extended.

State Tax Statutes.

Some states have the same three- and six-year statutes as the IRS, but set their own time clocks, giving themselves more time to assess extra taxes. In California, for example, the basic tax statute of limitations is four years, not three. However, if the IRS adjusts your federal return, you are obligated to file an amended return in the states that the income applies to allow for the IRS adjustments. If you don’t, the state’s statute will never run out. In addition, as in most states, if you never file a return, the statute never starts to run. Some advisers suggest filing nonresident returns just to report state source income to begin the state’s statute. There can be many tricky interactions between state and federal statutes of limitations.

Call 855-829-5877 for details.

LEGACY TAX & RESOLUTION SERVICES, LLC

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