IRS Audit Exceptions to Statute of Limitations

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IRS Audit Exceptions to Statute of Limitations

One critical factor that the IRS considers when auditing a personal or business return is the tax audit statute of limitations. The statute of limitations for tax audits is how long the IRS has to audit a return. This statute of limitations will vary for how an individual filed taxes or how long they’ve owned a business.

We’ll discuss the IRS statute of limitations for audits and exceptions.

What Is the Standard IRS Audit Statute of Limitations?

Usually, the statute of limitations for auditing tax returns is three years from the date the returns were filed. However, there are several scenarios that can trigger an audit extension. Some situations allow the IRS to extend the audit statute of limitations to 6 years or indefinitely.

Exceptions to the IRS statute of limitations

The following are some of the scenarios that could prompt the IRS to extend the tax audit statute of limitations on your returns:

Extension by Agreement (IRS Form 872)

IRS Code Section 6501(c)(4) provides that taxpayers and the IRS can consent in writing to extend the period of assessment. Such an agreement has to be executed before the audit period expires. IRS Form 872 is usually used to set an agreed extension to a specified time beyond the standard 3-year limitation period for audits.

Did Not File a Return

If you didn’t file a tax return at all, the IRS files a substitute return for you. In such a scenario, the statute of limitations starts when the IRS assesses your returns for any taxes owed. Keep in mind that this is usually a few weeks after the return is filed.

Fraudulent Return

There is no statute of limitation for false or fraudulent returns intended to evade tax. In such a scenario, the IRS can assess the tax at any time or initiate court proceedings for collection without any assessment.

Unreported Income

The statute of limitations is six years if your returns include substantial unreported income. Generally, not reporting more than 25% of your gross income can trigger an extension of the audit statute to 6 years.

Unreported Foreign Income, Assets, or Gifts

Failure to report more than $5,000 in income attributable to specified foreign income, assets, or gifts can extend the audit limitation to 6 years.

Withheld Information on Foreign Transfers

Failure to furnish the IRS with critical information regarding foreign transfers can also extend the IRS audit statute of limitations. If you hold any interest in a controlled foreign partnership (CFP), a foreign entity, like a controlled foreign corporation (CFC), or certain foreign trusts, by law, you are required to file information returns showing your foreign interests.

Required returns include foreign corporation forms 926 and 547, foreign trust forms 3520 and 3520-A, and foreign partnership form 8865. Usually, the statute of limitations on your returns will only start once you file the information return.

Amended Return

If you want to amend a tax return, it is vital to abide by the standard timeframe of 3 years from the original filing date. Many taxpayers assume amending a tax return will restart the IRS three-year audit statute, but this usually doesn’t. However, an amended return that reports a net tax increase can trigger an extension of the statute of limitations.

In a nutshell, if your amended tax return shows higher taxes, the IRS may extend its audit period.

What’s the Difference Between the IRS Audit Statute of Limitations and the CSED Collection Statute Expiration Date?

As mentioned earlier, the IRS audit statute of limitations is how much time the IRS has to audit returns. On the other hand, the Collection Statute Expiration Date (CSED) is how much time the IRS has to collect your taxes. The collection period is the time specified by the law regarding when the IRS can collect taxes from a delinquent taxpayer.

The standard CSED is ten years from the date the IRS first assessed your returns. However, like with an audit statute, the initial CSED can be extended.

Some of the common events that can extend the CSED beyond ten years include:

Notice of intent to audit from the IRS can be overwhelming. It is important to know the IRS audit statute of limitations and exceptions. If you need help preparing for IRS audits, seek assistance from a seasoned professional tax attorney. Wiztax can help gather all the paperwork you need and guide you through the audit process.

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