You’ve filed your tax return, how long does the IRS have to audit you?

You’ve filed your tax return, how long does the IRS have to audit you?You’ve filed all of your tax returns, and because of your level of income you find yourself in the class of taxpayers whose return is more likely to trigger an IRS audit. So you wonder, how long does the IRS now have to audit you?

Due to disclosure requirements, the IRS makes contact with a taxpayer selected for an audit by telephone or mail only.  When returns are filed, they are compared against norms for similar returns. These norms are developed from audits of a statistically valid random sample of returns, selected as part of the National Research Program conducted by the IRS to update return selection information.

I.R.C. § 6501 of the Internal Revenue Code provides a three-year statute of limitations on tax audits. Typically, the IRS can include returns filed within the last three years in an audit. The IRS attempts to audit tax returns as soon as possible after they are filed.  Most audits will examine returns filed within the last two years.

It’s important to remember that obtaining an extension to file a tax return also extends the time a return is subject to audit. For example, if a taxpayer filed her 2014 tax return on April 15, 2015, the IRS deadline to audit it is April 15, 2018, to audit it. However, if the taxpayer requested an automatic extension and filed Oct. 15, 2015, the IRS has until Oct. 15, 2018 to audit the return and assess any additional tax and penalties.

Section 6501 also sets forth a second statute of limitations. If a substantial error (the IRS finds that a taxpayer omits from gross income an amount that exceeds 25 percent of the stated gross income) is identified by the IRS, the three-year limit is doubled to six years. In that case, a 2014 return could be audited by the IRS until 2020. Taxpayers underreport income for a multitude of legitimate reasons. For example, it is very common for taxpayers to overestimate the cost basis for calculating the gain on the sale of property held long-term.

Note that if a taxpayer discloses income on the tax return, or in a statement attached to it, and does so to adequately allow the IRS to review the classification of the item claimed as income, the IRS will not consider this amount as an omission from gross income. Thus, if a taxpayer used an estimated cost basis for the reduction of capital gains income on the sale of property, but disclosed this and the possible lower cost basis on an attached written statement, the IRS would still only have three years to audit the return.

Worth noting about the six-year statute of limitations is the issue heard by the Supreme Court in 2015. In U.S. v. Home Concrete & Supply, LLC, the Supreme Court dramatically cut back on the IRS’ power to increase the statute of limitations on an audit to six years. The Supreme Court held that overstating your tax basis was not the same as omitting income. The Supreme Court said that three years was enough time for the IRS to conduct an audit. However, Congress responded and enacted H.R. 3236, the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015,overruling the Supreme Court. Based upon this legislation, the tax code now reads: “An understatement of gross income by reason of an overstatement of unrecovered cost or other basis is an omission from gross income.” This applies to tax returns filed after July 31, 2015, as well as previously filed returns still open.

Finally, there is a third statute of limitations: The IRS has no time limit when an audit relates to a tax assessment if a filed return is false or fraudulent, reflects a willful attempt to evade taxation or when no tax return is filed. Thus, tax fraud and willful tax evasion will result in no time limits on an audit.

If an audit is not resolved, the IRS may ask you to extend the statute of limitations for assessment tax, which limits the time allowed to assess additional tax. The statute of limitations is generally the later of three years after a return is due or was filed. If a taxpayer chooses to extend the statute of limitations, it will allow additional time to provide further supportive documentation, request an appeal if unhappy with the results of the audit, or to claim a tax refund or credit. An extension also allows the IRS sufficient time to complete the audit and process the results. Keep in mind that a statute of limitations also exists for making refunds. A taxpayer does not have to agree to extend the date that the statute of limitation period terminates.

Because each case is different and has its own set of facts and circumstances, it is important that if you live in the Tri-State area and receive notice of an IRS audit, you consult with an experienced and knowledgeable tax attorney to deal with the IRS and minimize any damage related to its audit. Call THE TAX EXPERTS at the Thorgood Law Firm For a FREE consultation call 212-490-0704.

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