For How Long Can The IRS Audit Me?
This is a commonly recurring question that we CPAs get. The fear of an IRS audit runs deep – right up there with death and public speaking for many folks!
And rightfully so. In my experience as a CPA handling audits for many clients, even the simplest of routine tax audits can get expensive, not to mention a drain on the nerves.
So what, if anything, prevents the IRS from just going back forever if it decides to audit you?
Fortunately, the tax law contains something called the statute of limitations (referred to from here on as SOL, no pun intended). If the SOL has expired, well then the IRS is SOL (pun definitely intended)!
So it helps to know what the SOL is and how it works.
The standard SOL gives the IRS three years to pursue an audit on a taxpayer. That three-year time period begins on the due date of the return or the actual filing date, whichever happens to be later.
Now, if you've read this column long enough, you realize there are almost always exceptions, and it is no different here. The standard three year SOL is doubled to six years if you have omitted from your tax return 25% or more of your income.
Fortunately, the burden of proof here is on the IRS, but if successful the IRS can audit your entire tax return, deductions and all, for that entire time period. In other words, it's not just the omitted income they can assess tax upon going back that far, but they can challenge every other item on your return.
Another exception to the three-year rule is that there is no time limit if you never filed a return for the year in question in the first place.
There is also no time limit on fraud. As with the understatement of income exception discussed earlier, the burden of proof for fraud is on the IRS, and it is a fairly high burden. This effectively keeps them from always asserting fraud just to get more time to audit.
That said, if you find yourself with a fraud assertion against you, immediately seek legal guidance and representation.
You may find it surprising to know hat in some cases it is recommended to give the IRS permission to extend the statute of limitations. Ok, I know I know, you think that would be nuts!
But here's the deal. It's not unheard of for the IRS to decide to audit a taxpayer not long before the normal SOL is set to expire. Knowing this, the IRS will ask for the SOL extension.
Usually, it is recommended that you agree. In fact, it usually does not end well for someone who will not agree. If you decline, the IRS can and will assess extra tax immediately, leading to a bigger mess than you would have otherwise.
The IRS has the upper hand at this point, so it is generally advisable just to go along with the process and agree to the extension.
There are also time limits you need to know with regard to filing an amended tax return and/or claiming a refund. An amended return normally should be filed within three years of the original return.
Note, however, that if you file an amended return that increases your tax within sixty days of the expiration of the SOL, the IRS gets sixty days from the amended return's filing in which to assess the tax on your amended return.
This keeps taxpayers from filing right at the end of the SOL, not paying what is owed, and then claiming the IRS cannot collect since the SOL expired. An amended return, however, that does not increase your tax does not likewise extend the SOL.
Now, let's say you have not filed a tax return for a particular year and you think when you file you are due a refund. You figure you have unlimited time to do that (since the SOL is unlimited for unfiled returns), right?
Well, no! As often is the case, the rules for you are different than they are for Uncle Sam. For unfiled returns, you have only TWO years from the time the tax was PAID to file a claim for refund.
Generally, withholding is considered "paid" on April 15 of the year following the year in question for unfiled returns. In other words, the normal due date of the unfiled return.
There are other considerations with regard to SOL matters beyond the scope of this article that I will just mention here.
First, SOL issues can be made more complicated if you own an interest in "pass-through" entities such as a partnership or S corporation, since the dealings they have with the IRS can affect you as well. Also, states may have SOL laws that differ from federal laws.
Finally, remember that when the SOL ends is largely dependent on when it began. For that reason, it is critically important to keep good records of when a return is filed, such as a certified mail receipt or an electronic filing acknowledgment. Sometimes that can mean the difference in having to deal with an IRS audit and not.
