STATUTE OF LIMITATIONS FOR IRS AUDITS AND ASSESSMENTS
There are several “statutes of limitation” found in the Internal Revenue Code (“IRC”), which time-bar the IRS from dragging out a taxpayer’s case. In this blog, we are going to focus on the statute of limitations applicable to assessments (through the audit process). Generally, the IRS only has a limited amount of time to examine your tax return(s) from the time it is filed. The statute of limitations however is able to be extended under certain circumstances to allow to IRS to dive even deeper into your previously filed returns. Therefore, it is important to understand what the statute of limitations (federal) are for auditing your tax return(s).
WHAT IS “STATUTE OF LIMITATIONS”
Let’s define what a statute of limitations is and when the timer begins. A statute of limitations places a end-date on certain legal actions (it protects taxpayers from having to look over their shoulder forever). In this case, we are referring to the amount of time the IRS has to initiate an audit before it is prevented by statute. As for the actual start date for the statute of limitations, the timer generally begins when the return is actually filed, not from the year the tax return was due.
A taxpayer does not file their 2016 tax return by the due date of April 15th 2017 or by the extension date of Oct. 15th 2017. Instead, they file their 2016 tax return on July 15th of 2018. Because the return was filed late, the statute of limitations will begin on the date it was filed.
For more information on the general rules you can look at Internal Revenue Code “IRC” § 6501(a). Now, let’s take a look at how long the statute of limitations actually is.
THREE YEAR LIMIT AND BOOKEND AUDITS
Generally the statute of limitations for the IRS to initiate an audit of your tax return is three years from the filing due date of the return or from when the return was filed, whichever is later.
Using the example above:
The 2016 tax return was filed on July 15th of 2018, which starts the three year statute of limitations. This means that the IRS will have until July 15th of 2021 to initiate an audit of the 2016 tax return.
If you file your return before the filing due date, the statute of limitations will begin on the due date and not the date you actually filed the return.
A common practice of the IRS is to conduct what is referred to as a bookend audit. This will typically occur when the IRS audits a return and then looks at the tax returns for the year before and the year after the return being audited. If they see that the returns are all claiming similar income amounts, taking similar deductions or claiming the same credits, they have the ability to open up the initial audit to include the additional two years.
EXTENDING THE THREE YEAR LIMIT
The three year statute of limitations can be extended to six years if the IRS determines that 25% or more of your gross income was omitted from the return. This does not necessarily mean it will cause the IRS to audit additional tax years, especially if they are outside the statute of limitations. It simply means the IRS is extending the three year statute of limitations to six years for the one particular year.
All your tax returns have been filed on time every year, meaning the statute of limitations begins on the filing due date for each tax return. The IRS determines that on your 2012 tax return you omitted 25% or more of gross income. The due date for this return would have been April 15th of 2013 (the start date for the statute of limitations). Because of the gross income omission, the statute of limitations would therefore expire on April 15th of 2019 (six years from the filing due date). If the IRS is not able to determine their was was 25% or more of your gross income omitted on any other tax return, the statute of limitations would remain at three years for every other return. This means the IRS would generally not be able to initiate an audit for the tax year 2013 or any years before 2012 because the statute of limitations would have expired.
For more information on extending the statute of limitations take a look at IRC § 6501(e).
Above we have discuss the general rules for the statute of limitations and the IRS’s ability to extend it but, there are certain cases where the statute of limitations will not apply. If the return that you filed is deemed to have been fraudulently filed by the IRS, the statute of limitations becomes indefinite. This means that it does not matter how old the return is or when the return was filed, if the IRS can prove the return was filed fraudulently, they can initiate an audit.
The indefinite statute of limitations also applies to returns that were never filed. For instance, if you never filed a return and the IRS files a substitute return, the IRS has the ability to go back at any time and make adjustments to that substitute return.
The IRS’s ability to initiate an audit or make additional assessments to a tax return beyond the initial three year statute of limitations is a fact specific inquiry. This means they are unable to audit a tax return or make additional assessments beyond the three year statute of limitations unless they have evidence to support the inquiry. If you are currently going through an audit or have received a notice stating the IRS will be initiating an audit, it is advisable to speak with a tax attorney so you are aware of your rights as a taxpayer. Audits can be difficult to navigate and without the knowledge to properly defend your position taken on the tax return, you could end up facing a tax assessment along with some stiff penalties.