Contrary to popular belief, the Internal Revenue Service is subject to legal limitations regarding the examination of a taxpayer’s return and the IRS does not have an indefinite period to audit returns. Generally, the IRS is limited to a three-year statute of limitations from the filing date of the return. However, there are other circumstances where the IRS can go beyond the three-year statute. For example, when the taxpayer omits from his return an income item greater than twenty-five percent.
The six-year statute of limitations also applies when a taxpayer fails to disclose a foreign asset that generates $5,000 or more in income. The important thing to keep in mind is that these statutes of limitations, whether they are three or six years, start to run when the return is filed (not the year the tax return is filed). In the event that a return is not filed, the IRS has an indefinite amount of time to audit one year in cases where it believes fraud is likely.
The statute of limitations is also indefinite when the taxpayer files a false or fraudulent return. Official IRS information on the statute of limitations can be found at http://www.irs.gov/irm/part25/irm_25-006-001r.html.
There is one additional exception. Taxpayers may choose to extend the statute of limitations to allow more time to review a return. Although there are nine IRS forms that allow the extension of the statute, only two are specific to individual taxpayers. There are two that the taxpayer must complete to consider an extension:
• Form 872 Consent to Extend Time to Assess Taxes
• Form 872-A Special Consent to Extend Time to Assess Taxes
First, the purpose of the Form 872 is to extend the evaluation time to a specific date. However, finally, Form 872-A is intended to extend “the limitation period indefinitely” (MBBP). The taxpayer’s consent given on Form 872-A is revocable; the taxpayer must file Form 872-T to revoke consent. Submission of the form begins the 90-day period. This period is specific to the assessment of the tax or the issuance of a notice of deficiency.
In fact, there is another type of consent, which is called “restricted consent.” Restricted consent is when the statute of limitations on the evaluation period is only extended with respect to specific and restricted matters. The taxpayer agrees with the IRS to keep only certain issues open and let the statute of limitations expire on everything else. This decision is made during the course of an audit within the guidelines of the issues being examined.
In conclusion, knowing the legal deadline is important because it allows the taxpayer to have closure after filing a return. Once the statute of limitations has passed, the IRS can no longer audit a return and the taxpayer is safe from audit. For more information on this and other auditing topics, visit http://www.sambrotman.com
