Laurence Lawler: Hi! I am Laurence Lawler, National Director of the American Society of Tax Problem Solvers. This series is on how to prepare for an IRS Audit.
The first thing that we are going to be discussing is the length of time that the IRS is able to audit your tax return. That's commonly referred to as the statute of limitations. The statute of limitations varies depending upon a situation the taxpayer finds himself in. Normally, for most taxpayers the statute runs three years, and that would be three years from the due date of the tax return or the date it was actually filed, whichever is later. So if you didn't file your return on time, the three years that they are able to audit you didn't start until you actually filed it.
Also, if an extension was filed, then the three years doesn't start until the extension due date. So you could have a return run from April 15 for three years or from October 15, which is the extension due date for three years, or in fact from any other date when you actually file the return it would be later than those dates. They have three years in which to audit the tax return under normal situations.
Obviously, every situation with the IRS is not normal. You may get into a situation where the IRS could audit tax return for up to six years. That usually happens when there has been a material misstatement, generally defined as 25% of income that was not reported. So at that point in time the IRS can show that there was a material mistake that your income was underreported by 25%. They actually then have six years in which to audit you.
This does not involve fraud. It's not a case that rises to the level of fraud. That would be the third statute of limitations where the statute never starts to run, because if a taxpayer files a fraudulent tax return, the statute never runs and the IRS can look at that virtually forever.
My first recommendation is that you always file your tax return on time. If you can't get it in by the time April 15 deadline, to be sure to file on extension and get it filed before that extension runs out. Filing on time actually starts the statute running and is the best thing for the taxpayer, even if you can't pay the taxes. The recommendation is to file that return timely. It first of all eliminates a penalty for failure to file, even though the failure to pay penalty may continue to run.
But what if you can't pay the tax you owe? Aren't you going to start the IRS chasing you at that point in time? Well, the answer to that is really yes, in a way. However, it also is eliminating a lot of other problems.
First of all, the taxpayer cannot be found to be fraudulent in any way if they file timely. If they didn't pay the tax, it's simply a financial matter. We've got to make arrangements to get that tax paid somehow. You might be able to use several of the various tools that are involved in solving tax problems when a taxpayer can't pay. There are many, many options available there.
That covers pretty much the situation of when to file and how long the IRS has to audit you. The next step would be what prompts the IRS to audit in the first place which we will cover in the next section.