IRS Audit Period Is 3 Years, 6 Years Or Forever: How To Cut Your Risk

Robert W. WoodContributor TaxesI focus on taxes and litigation.

It is only natural to worry about an IRS audit, and the duration of audit periods can be downright frightening. Tax lawyers and accountants are used to monitoring the duration of their clients’ audit exposure, and so should you. Watch the calendar until you are clear of audit. In most cases, that will be either three years or six years after you file your return. But in some cases, even though you filed and thought everything was in order, the statute of limitations on the IRS ability to audit you never runs. The basic rule is that the IRS can audit for three years after you file, but there are many exceptions that give the IRS six years or longer. For example, the three years is doubled to six if you omitted more than 25% of your income. This 25% rule can apply to tax basis too.

Say you sell a piece of property for $3M, claiming you bought it for $1.5M. In fact, you paid only $500,000. The effect of this basis overstatement is that you paid tax on $1.5M of gain, when you should have paid tax on $2.5M. In U.S. v. Home Concrete & Supply, LLC, the Supreme Court held that overstating your basis is not the same as omitting income. The Supreme Court said 3 years was plenty for the IRS to audit. However, Congress overruled the Supreme Court, giving the IRS six years in such a case.

The IRS also gets six years to audit if you omitted more than $5,000 of foreign income (say, interest on an overseas account). Six years is a long time, and the IRS has no time limit if you never file a return or file fraudulently. Another scary rule is that the IRS can audit forever if you omit certain tax forms. They include Form 5471 if you own part of a foreign corporation, Form 3520 for gifts or inheritance from foreign nationals, and Form 8938 for overseas assets. There is a ten year statute too. Once a tax assessment is made, the IRS collection statute is typically ten years.Today In: Money

Figuring out the applicable statute of limitations that applies to you and then waiting it out can be nerve-wracking. An audit can involve targeted questions, or audits can ask for proof of virtually every item. Frequently, the IRS says it needs more time to audit. The IRS will ask you to sign a form extending the statute of limitations, usually for a year. If you don’t sign, the IRS will send you a tax bill, usually based on unfavorable assumptions. Most tax advisers tell clients to agree to the extension. However, it’s best to get some professional advice about your own situation. You may be able to limit the time or scope of the extension.

To help limit your exposure, here are some tips…