Published on: April 4, 2017 Last modified: October 21, 2020

Tax Audits and Statutes of Limitations

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    There is understandable concern regarding how far back the IRS can look when auditing tax returns. While generally the IRS can look back three years after a filing during an audit, there are many exceptions to this rule.

    The statutes of limitations

    The three-year statute of limitations can become six years if there is an omission to report over 25 percent of one’s income on a tax return. The IRS interprets such an omission as being much more than not reporting income on a return. Any reporting “that has the effect of an omission of income” can trigger a six-year statute of limitations period.

    Such an interpretation is controversial. For example, not too long ago the U.S. Supreme Court ruled that overstating one’s basis on investment property would not be an omission concerning reportage of income. However, despite the court’s decision, Congress at a later date decided to give the IRS a six-year statute of limitations period when such an overstatement of basis occurred. The IRS can also use this six-year limitations period concerning omissions in reporting over $5,000 in foreign income. And there are many instances when this time period can be much longer. In fact, there is no time period whatsoever regarding fraudulent filings or the failure to file a return.

    The IRS has incredible power when it comes to enforcement of tax laws, and such enforcement can apply to statute of limitations laws as well. For instance, there can be circumstances where the IRS will ask Michigan taxpayers to provide written permission to extend the statute of limitations. The failure to sign such a form could mean the IRS will serve the taxpayer with an assessment.

    Understand the law

    It’s important to consider seeking legal advice anytime questions regarding a tax audit arise. Because audits can be so broad ranging concerning information sought, understanding how far back the IRS can look is of the utmost importance.

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