If you fail tofile your tax returns or the Internal Revenue Service (IRS) notes any mistakesor irregularities on the returns that you do submit, it may initiate an audit,which is an in-depth examination of your financial records and transactions.
Although peopledread the idea of an IRS audit, they don’t happen often. The agency estimatedon its website that nearly 1.1 million of the tax returns filedfor the 2016 calendar year were audited. That sounds like a lot, but itactually represents only 0.5% of all returns filed that year.
Audits are typically triggered by:
- Failing to report income that theIRS knows you received. For example, if you earn extra money freelancing, itcan raise a red flag because the parties who hired you likely already sent theIRS a Form 1099 reporting the income.
- Reporting losses for too many yearson your Schedule C (if you are self-employed)
- In years past, deducting too manywork expenses, especially if those expenses don’t appear to be relevant to thework that you do.
- Claiming too many charitabledonations.
Statistically,those in higher income brackets and those who report no income at all get themost attention from the IRS, but an audit can happen to anyone at any time.
HowLong Does the IRS Have to Audit You?
In mostinstances, the IRS observes a statute of limitations of up to three years toinitiate an audit. The countdown begins with the later of the two dates below:
- The date on which the tax returnwas originally due
- The date on which you originallyfiled it. If you obtained an extension by filing Form 4868, this date could beup to six months later than the original due date
There are someexceptions to the three-year statute of limitations. The most common ones areexplained in detail below. If you have reason to believe that any of them mayapply to you, contact an experienced tax audit attorney as soon as possible todiscuss your situation and develop a strategy in the event that you are audited.
Up to Six Years
If your taxreturn suggests that you have understated your income substantially (in mostcases, this means an understatement of at least 25%), the IRS may have up tosix years to carry out an audit.
No Time Limit
Under some circumstances,the IRS has an unlimited amount of time in which to audit you. This outcomegenerally happens in the following scenarios:
- You don’t file a tax return. This is why it isessential to at least file on time, even if you can’t afford to pay any tax youowe. If you are not ready to file by the deadline for any reason, seek anextension and consult with an experienced tax attorney who can advise you howto get caught up on back taxes. Even if you miss the deadline, it’s importantto file the return to limit the number of years the IRS can audit you.
- You file a fraudulent tax return. Filing afraudulent return can result in a three-year jail term and a fine of up to$250,000 (for individual taxpayers) or $500,000 (for corporations). The IRS can also assess a civil fraud penaltyof 75% of the tax due.
If you are beingaudited, you may be asked to sign a form that extends the statute oflimitations that ordinarily apply to your case. It is not recommended that yousign an audit extension without speaking to a tax attorney first.
How LongDoes the IRS Have to Collect?
Once the IRSmakes a tax assessment, the collection statute is usually 10 years, but likethe three-year statute of limitations for audits, it can be extended. In Beeler v. Commissioner, the officer of acompany was held responsible for payroll tax penalties that were over 30 yearsold.
Few situationsare more alarming than the prospect of being audited by the IRS. If you receivean audit notification in the mail, contactPaladini Law for a case review.
When you arefacing a serious tax situation such as an IRS audit, Attorney Brad Paladiniwill review your situation with you and guide you through viable options. Formore information or to schedule a confidential consultation, please contact Paladini Law or call201-381-4472.