What is the Statute of Limitations for the IRS to Conduct an Audit?

Generally speaking, the IRS has 3 years to audit a tax return from the date it was filed. There are many reasons why this “statute of limitations” can be increased beyond the 3-year limit including, but not limited to:

1. If income was grossly underreported or misstated by more than 25% (extends audit statute to 6 years or longer)

2. Consistent abuse of deductions, valuations, or other strategies to reduce taxable exposure

3. Failure to file (there is no statute of limitations when a return has not been filed)

4. Filing a return with intent to commit fraud (there is no statute of limitations)

The IRS usually begins an audit in the year following the submission of the tax return itself. This may not always be the case, but the IRS is very aware of the 3-year statute of limitations, and it wants every opportunity to collect the full amount of tax possible from each return audited. IRS audits can be quite expedient, or they can drag on for months and even years. There are several important elements of an IRS audit, and it is important to fully understand the IRS strategy and impact of time upon your audit.

If you have been contacted by the IRS for any reason, especially an audit, you should contact the experienced tax attorneys at Allen Barron, Inc. immediately for a free and substantial consultation at 866-631-3470. We will provide significant protections such as the “attorney-client privilege” and manage all communications with the IRS on your behalf. Our clients value the perspective, experience, and insight we bring to each meeting and often feel like a weight has been lifted from their shoulders after our consultation.

When is the Statute of Limitations an Ally for a US Taxpayer?

The IRS is not always efficient when it comes to their approach to an audit. It is not unusual for the IRS to send a notice to the taxpayer during an audit asking them to waive the statute of limitations in their case. One of the primary questions in many audits is:

Should a US Taxpayer Agree to Waive the Statute of Limitations During an Audit?

The statute of limitations is an excellent tool to push the IRS to complete the audit. If we have provided all appropriate information, we refuse to allow the statute to be extended. This forces the IRS to either make a determination or let the timeframe pass, at which point you are released from the burden and liabilities associated with the audit. The statute of limitations forces the auditor to complete the audit and issue the determination letter. In many cases, we want the IRS to issue the “Notice of Determination” so that we can proceed to an appeal and work to have any additional liabilities reduced or eliminated.

Are There Times When a US Taxpayer Should Agree to Extend the Statue of Limitations?

Yes, absolutely. It is important to understand that auditors refer to the appeals managers as “the candy store” or the “gift shop” because they often give U.S. taxpayers a substantial reduction on the amounts established in the “Notice of Determination” at the conclusion of the audit. The key issue is this:

If information is not contained within the files of the audit itself, you cannot add it later on appeal or if you go to tax court.

We are often struggling with IRS auditors, not only on specific line items and supporting details, but in accounting theory and processes as well. It is not unusual for us to have to educate the IRS auditor on the underlying accounting strategies and systems so that they can understand and accept the information provided and correctly apply U.S. tax laws to that data. It may be important to agree to extend the statute of limitations to ensure that all information regarding your audit (as well as any issue we intend to dispute in an appeal or in court) is contained within the files of the audit. There are many situations where the timeframes involved exceed the 3 years established by the statute of limitations and it is in our client’s interest to extend the statute.