Who likes taxes? Would you not want to say this to IRS? “Sorry, you’re deadlines gone, you can’t audit me right now.”
Here’s a fact: The IRS has a time span of 3 years after you submit your file for an audit. In certain scenarios, that audit might reach up to 6 years.
With that, most people do not want to be audited by the IRS. Even after paying your taxes, it’s not a fun process explaining why and what you do. Plus, if your income includes unusual activities, then there might be a problem.
Thus, it is assuring to know how far back you can get audited. Plus, knowing what exactly statute of limitation applies to you is a daunting experience. If you are an adult, for example, the IRS may require visual proof of certain items or all of them. That is why the IRS usually says they need extra time to audit you.
But that’s not all. The IRS will also ask you to sign a form that extends the limitation. And if you refuse to sign they will send you a tax bill. That is why most tax advisors tell you to accept the form. But, it is always better to consult a professional advisor on the matter for the best course of action.
IRS Audit Timeframes
The usual time required by the IRS is 3 years. However, there are some cases that require 6 years or more. If you omitted over 25% of your income, the 3 years period becomes 6 years.
“Omitting” however is a broad term. Throughout US legal history, there was always the conflict on what that included. Taxpayers and some courts may assume “omit” means leave off, as in don’t report. However, the IRS says it is much more than that. Say you sell a piece of property for $3M, claiming that your basis (what you invested in the property) was $1.5M. In fact, your basis was only $500,000. The effect of your basis overstatement was that you paid tax on only $1.5M of gain when you should have paid tax on $2.5M.
In U.S. v. Home Concrete & Supply, LLC, the Supreme Court punished the IRS saying that overstating a basis is not like omitting your income. The Supreme Court has also stated that 3 years is more than enough to audit and that 6 years are for specific cases. However, do note that filing early will not start the audit timeframe, as the IRS does not account for early registrations. You also need to know that the IRS reserves the right to audit indefinitely if an omitted income is detected. As soon as a tax assessment is done, the IRS statute is 10 years. In specific cases, those 10 years can be renewed.
Another essential subtopic that’s discussed with the statute of limitations is offshore accounts. The IRS follows offshore accounts eagerly and this brings up another IRS rule. The IRS will also have a 6 years period to audit if you omitted more than $5,000 of foreign income (say, interest on an overseas account). That fits the audit period for FBARs because it can incur civil and criminal penalties.
For those reasons make sure to be careful and always consult a professional on that matter.
Here are two tips for you:
- Always have good records, and keep copies of all your past tax returns.
- Have your return professionally prepared at all times.