How was the IRS audit window recently expanded from 3 years to 6 years? What changes provided the IRS with more power to go back into prior year’s returns than ever before? The standard IRS statute of limitations for an IRS audit was considered to be 3 years. The key lies in understated income. If you have understated or under-reported your income by more than 25% the IRS can go back six years to audit your returns.
A recent US Supreme Court decision ruled that the IRS had “plenty of time” to audit, seemingly reaffirming the 3 year statute of limitations. However, the US congress disagreed and passed new legislation extending the IRS audit window if a US taxpayer under-reports income by more than 25%. How is this possible? The factors in this discussion are not limited to income that the taxpayer failed to report, but extends to income that was potentially understated as well.
One example is the sale of real estate or stock in which the taxpayer claims a basis that is too high. If you sold a piece of real estate locally for $1.5 million, and claimed a basis of $1 million, the net gain in general terms could be $500,000. However, if the actual basis was only $500,000 (not the $1M claimed by the taxpayer in this example) the actual income would be substantially higher, and the failure to accurately report these gains could easily drive the differential above the 25% threshold.
Why is it important to understand the IRS statute of limitations? The IRS is constantly complaining that 3 years is not enough time to complete an audit, and in many cases they will actually ask the taxpayer to voluntarily extend the statute of limitations past the 3 year limit. In many cases this is not in the taxpayer’s interest and your tax attorney should advise against signing the voluntary extension. In some cases, however, it may be necessary to voluntarily extend the statute especially when your tax attorney is working to expand the information contained within the “audit file” which serves as the basis for any subsequent IRS audit appeal of the “Audit Notice of Determination”.
The experienced IRS audit attorneys at Allen Barron routinely advise their clients regarding the IRS audit window, the statute limitations and the additional exposures a taxpayer may face due to the failure to file a return, missing tax forms or understatement of income. You should never face the IRS on your own. This is another reason why it is so important to work with an experienced and proven San Diego IRS tax attorney who can protect your interests, maximize the opportunity to reduce what you owe and manage all communications throughout the audit. If you are facing an IRS audit or have been challenged on a tax return that is more than 3 years old we invite you to contact us for a free and substantial consultation at 866-631-3470.