What is the statute of limitations for an IRS audit? What rules extend the window for an IRS audit? How long does the IRS usually have to complete an
audit of your taxes?
Everyone may have a little fear in the back of their minds while filing their taxes, perhaps wondering to themselves, “What if I get audited?” The IRS uses algorithms and “patterns of behavior” to establish areas of activity to target each year and produces a bell curve for that specific data point. If your return falls outside the bell curve median, your risk of an audit dramatically increases.
Though the actual risk that any given individual will face an audit in the months or years to come is relatively low, there is still a chance — and the window for the Internal Revenue Service to audit you will increase if you make specific mistakes or take certain steps.
Ordinary Statute of Limitations for an IRS Audit
What is the ordinary statute of limitations for an IRS audit? The IRS has
three years from the date your tax return is filed to audit the return. The clock starts on the due date of their tax filing. In other words, filing your taxes early doesn’t start the clock earlier. Sending your filing in during the month of February doesn’t mean the clock begins in February. It would start on April 15 if that was the associated due date for the return in question. If the taxpayer filed for an extension, the statute extends to that extension’s due date (i.e., October 15).
Now, how can this
three-year window be extended? If you underestimate your income by at least 25 percent, then the IRS can double the audit window for your tax filings to
six years. The same doubling effect applies if you fail to report $5,000 or more of foreign income, such as in overseas accounts, or if you substantially “overstate” the “basis” (what was actually paid to acquire that asset).
For example, if the taxpayer acquired an asset for $1,000,000 and sold it for $3,000,000, it would generally result in a $2,000,000 capital gain. If the taxpayer overstated the basis in this example to $2,000,000, it would reduce the amount of the associated capital gain by $1,000,000, resulting in a substantially lower tax liability.
Failure to File Removes the Statute of Limitations for an IRS Audit
Failing to file a tax return completely removes the statute of limitations for an IRS audit. One of the primary reasons to file a tax return is to start the clock on the statute of limitations for audit. The failure to sign your tax return also removes the statute of limitations. The absence of a signature results in an invalid tax filing, removing any statute of limitations. The IRS can then audit you at any point, and the window of risk remains open.
The clock on the statute of limitations for an IRS audit also doesn’t begin if the U.S. taxpayer fails to file specific forms relating to foreign (offshore) gifts, inheritances, income, or assets.
This applies to failure to file or underreporting on IRS Form 8938 or 5471 and
FinCEN Form 114 (FBAR).
Not only can a U.S. taxpayer’s actions extend or eliminate the statute of limitations for an IRS audit, but they can also open the door to additional substantial tax exposure, penalties, interest, and even criminal prosecution.
If you have failed to file a tax return with the IRS or are concerned about understatement of income, overstatement of basis, or the failure to make a complete, accurate disclosure of all income and assets, foreign and domestic, it is time to come into compliance with the IRS.
There are several options for amending, updating, or filing tax returns with the IRS. It is important to discuss this matter with our experienced
tax attorney, Janathan Allen, who has the experience and expertise to guide you through
domestic and
international tax issues and challenges, as well as the available strategies and IRS programs to come into compliance.
We invite you to learn more about the integrated tax, legal, accounting and business consulting services of Allen Barron and contact us or call today to schedule a free consultation at 866-631-3470. 
