Contrary to popular belief, the Internal Revenue Service is subject to statutory limitations with respect to examining taxpayer returns and the IRS is not allowed indefinitely to audit returns. Generally, the IRS is limited to a statute of limitations three years from the date a return is filed. However, there are other circumstances when the IRS can go beyond the statutory three years. For example, when the taxpayer omitted an item of income that was greater than twenty-five percent of the return.
A six-year statute of limitations also applies where a taxpayer does not disclose foreign assets that generate five thousand dollars or more in income. What’s important to note is that these statutes of limitations, whether three or six years old, come into effect when the return is filed (not the year for the tax return). In cases where no returns are filed, the IRS has an indefinite period of auditing one year in cases where they believe fraud may be possible.
The statute of limitations is also not limited when taxpayers file false or fraudulent returns. Official information from the IRS on statute of limitations can be found at http://www.irs.gov/irm/part25/irm_25-006-001r.html.
There are additional exceptions. Taxpayers may choose to extend the statute of limitations to allow more time to examine returns. While there are nine IRS forms that allow for statutory extensions, only two are specific to individual taxpayers. There are two things that must be filled in by the taxpayer for consideration of the extension:
• Form 872 Consent to Extend Time to Assess Tax
• Form 872-A Special Approval to Extend Tax Assessing Time
First, the purpose of Form 872 is to extend the assessment time to a specified date. Finally, however, the purpose of Form 872-A is to extend the “time limit of assessment for an indefinite period” (MBBP). Taxpayer consent provided on Form 872-A may be revoked; taxpayers must file Form 872-T to withdraw consent. The submission of the form begins during the 90 day period. This period is exclusively for tax assessments or issuance of short notices.
There is indeed another type of consent, called a “limited consent.” Limited consent is where the statute of limitations on the assessment period is only extended with respect to specific and limited matters. Taxpayers agree with the IRS to open only certain matters and let the statute of limitations expire on everything else. This decision is made during the audit within the guidelines of the issue being examined.
In conclusion, knowing the length of the statute is important because it allows taxpayers to have closure after a return is filed. Once the statute of limitations goes into effect, the IRS can no longer audit returns and taxpayers are safe from auditing. For more information on these and other audit topics, please visit http://www.sambrotman.com