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Tax Time
How long can the IRS audit? It depends.
By Robert W. Wood
An IRS audit can involve targeted questions and requests of proof of
particular items only. Alternatively, audits can cover the waterfront,
asking for proof of virtually every line item. Even if you do your best
with your taxes, they are horribly complex.
Thus, if you face an IRS tax audit and can point to the statute of
limitations as a bar, you should. But figuring out exactly how long the
IRS has can sometimes be challenging. The basic rule is simple. The
primary IRS statute of limitations generally runs three years after you
file.
However, there are many exceptions that give the IRS six years or
longer. The statute of limitations is six years if your return includes
a substantial understatement of income. Generally, this means omitting
more than 25 percent of your gross income. But the six-year statute does
not apply if you overstated your deductions or credits rather than
actually omitting income.
The IRS has argued in court that other items on your tax return that
have the effect of more than a 25 percent understatement of gross income
should give it the full six years. After bitter lower court litigation,
even the U.S. Supreme Court got involved. In U.S. v. Home Concrete
& Supply, LLC,1 the Supreme Court held against the
IRS, holding that overstating your basis in an asset is not the same as
omitting income.
However, Congress then overruled the Supreme Court and gave the IRS
six years. So, if you overstate your basis in an asset you sell and
cross that 25 percent income mark, the IRS can audit you for six years.
The IRS gets six years in many other cases too.
The three years is also doubled if you omitted more than $5,000 of
foreign income (say, interest on an overseas account). Moreover, if you
receive a gift or inheritance of over $100,000 from a non-U.S. person,
you must file IRS Form 3520. If you fail to file it, your statute of
limitations never starts to run. (Forever is a lot longer than six
years.)
Another foreign asset form is IRS Form 8938. If you are required to
file and skip it, the IRS clock never runs. If you own part of a foreign
corporation, there is IRS Form 5471. If you fail to file a required Form
5471, your return remains open indefinitely.
More generally, what if you never file a return or file a fraudulent
one? The IRS has no time limit if you never file a return, or if it can
prove civil or criminal fraud. The same is true if you alter the
penalties of perjury language on your return.
With all the ways that the IRS gets extra time to audit, it may
surprise you to learn that the IRS may ask for more time. The IRS may
contact you, asking you to extend the statute of limitations. If you say
no, the IRS will usually make a tax assessment, usually one that is
based on unfavorable assumptions. Most tax advisers tell clients to
agree to the requested extension, but consult one about your situation.
Another trap involves an IRS John Doe summons, which can extend the
statute. So can being outside the country. If you are outside the
country for years and return, the IRS statute of limitations does not
run while you were away.
Innocent mistakes can sometimes be interpreted as suspect, and digging
into the past is rarely pleasant. Records that were at your fingertips
when you filed might be buried or gone even a few years later. So the
stakes with these kinds of issues can be large.
Tax lawyers and accountants are used to monitoring the duration of
their clients’ audit exposure, and you should be too. It pays to know
how far back you can be asked to prove your income, expenses, bank
deposits, and more. Watch the calendar until you are clear of audit.
Once a tax assessment is made, the IRS collection statute is typically
10 years. This is the basic collection statute, but in some cases that
can be renewed. Trying to keep all these rules straight can be
maddening. But there are few things more satisfying than being able to
show the IRS that it is too late to come after you.TBJ
ROBERT W. WOOD
practices law with Wood (www.WoodLLP.com) and is the author of
Taxation of Damage Awards and Settlement Payments, Qualified
Settlement Funds and Section 468B, and Legal Guide to
Independent Contractor Status, all available at www.TaxInstitute.com. This
discussion is not intended as legal advice.
This content is for informational purposes only. Consult an attorney regarding specific legal questions.
