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What is the Statute of Limitations for an IRS Audit?
Being audited is not pleasant. However, tax audits are conducted at the discretion of the IRS, and there is only so much you can do to steer clear of those. But IRS audits are subject to a statute of limitations; this means the IRS cannot initiate an audit after a specific number of years have passed since filing the tax return. By being aware of the statute of limitations for an IRS audit, you can save yourself trouble and money.
Tax Law Timelines for Audits
In terms of the statute of limitations, tax law is the same for individuals, partnerships, corporations, and nonprofit organizations. Under normal circumstances, the IRS can audit tax returns filed over three years. Here are some key features of the statute of limitations applicable to IRS audits:
The statute of limitations runs for three years from the due date of the return if the return is filed before the due date.
If you get an extension up to October for filing your returns, the three-year rule will apply from the new due date.
If you filed late without an extension, the three-year limit will apply from the date of filing.
Are There Any Exceptions to the Statute of Limitations?
If the IRS has reason to believe that there is an understatement of more than 25% of gross income, they can go as far back as six years. Some triggers that can lead to an extension of the statute of limitations on an IRS audit are:
Understatement of Income: If you have underreported your income by over 25 percent, you can be audited for up to six years. Doing this unintentionally does not clear you in the eyes of the IRS. If you paid less than what you actually owe as a result of overstating credits or deductions, the six-year rule also does not apply. If the IRS determines you acted fraudulently, you can be audited for any number of years!
Overstating Your Basis: Basis is what you paid for (plus any improvements to) an investment, tangible asset, or property you own. If you overstate your basis when you sell some investment, tangible assets, or property, you can be audited for up to six years. For example, you sell a property for $3 million and claim that your basis in the property was $1.5 million, when it was actually only $500,000 so you paid taxes on $1.5 million of the profit when you should have paid taxes on $2.5 million.
Omitting Foreign Income, Gifts, and Assets: Offshore assets and income have been a major trigger for IRS audits for a long time. If you omit more than $5,000 of your foreign income, you are leaving yourself open to a six-year audit window. Foreign income here includes interest earned on an overseas account. Simply disclosing the existence of the account or filing an FBAR reporting the existence of the account will not exempt you from the six-year rule. There are certain forms that have to be submitted when you have foreign assets or receive foreign gifts. Failure to submit these can cause an extension of the statute.
Fraudulent Return or Not Filing a Return: The IRS is not bound by any statute of limitations if you have not filed a return or if it can prove that you have committed criminal or civil fraud. Not signing your return also gives the IRS a good reason to extend the statute.
State tax statutes can vary from the three- and six-year federal tax statutes. For example, California has a four-year basic tax statute of limitations.
About the Author
Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.
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