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IRS Pushes Time Limit on Audits

August 23rd

Most of the time, the IRS has only three years after the date you file a tax return in which to complete your tax audit. Specifically, this generally means that with tax returns usually due April 15, the statute of limitations should run for exactly three years from that date. If you file early, the period still runs from the actual date the return was due. However, for those returns filed late or have tax debt, the statute runs for three years from the actual late filing date.

This could all potentially change. The IRS has been pushing for six years to audit instead of the standard three.

A Substantial Understatement of Income

At present, despite the current three-year statute of limitations, the IRS can take up to six years to audit your tax returns. The IRS can get double time to audit if your return includes a “substantial understatement of income.”

While this generally means that the tax return has omitted 25 percent or more of the taxpayer’s gross income, the exact definition is the current subject of litigation.

The IRS, in fact, argues that anything that has “the effect of a 25 percent understatement” qualifies for an additional three years. The IRS has been pushing especially hard for this more flexible definition of what might qualify them to go over the statute.

There have been several court cases on this subject up to this point. While the IRS did just earn a major victory, they are continuing to lose their cases elsewhere. Recently four appellate courts have denied the request by the IRS to apply the six-year statute of limitations broadly to all omissions of more than 25 percent of gross income caused by an overstatement of basis. Until the cases reach the Supreme Court and receive a ruling, it seems that courts are unwilling to let the IRS overstep its boundaries.



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