How Long Does the IRS Have to Audit Your Taxes? Tax Lawyer Rob Wood Explains
Benjamin Franklin told us that the only two things certain in life were death and taxes. Some taxpayers think getting audited by the IRS is the next thing to death. But you may never be audited, and there things you can do to cut down your risk of getting audited and the time within which the IRS can come calling. Tax lawyer Rob Wood tells you how to reduce both your risk of being audited your time of exposure in this report. He wrote about the subject in a recent Forbes article, "How Long Can IRS Audit? Tips To Cut Years And Audit Risks."
Wood says that the most common time period within which the IRS can launch an audit is three years after a return has been filed. Generally speaking, if the IRS comes around after three years, they are too late. Of course, there are exceptions to the three-year rule, and these are the things taxpayers need to be aware of. First off, if you never file a tax return, the three-year period never starts to run.
There are other exceptions, of course. Most of these have come about as a result of court fights between taxpayers and the IRS. In a recent case, U.S. v. Home Concrete & Supply, LLC, the Court held that a six-year rule did not apply in a certain circumstance. Congress then changed the law. The changed version of the rule says that the IRS has six years to commence an audit where the taxpayer has overstated its basis in a piece of property that has been sold for a profit.
For example, if you buy a piece of property for a million dollars and sell it for two million, you have a gain of one million dollars on which you owe taxes. If you claim that you paid $1.5 million for the property, you have overstated your basis (thus reducing your tax liability), and the IRS has six years to catch that misstatement on your part. The full version of this rule is that, if you understate your income to the extent that the understated amount is 25% or more of your income, the IRS has six years in which to begin the audit.
Foreign bank accounts are another exception to the three-year rule. Taxpayers with foreign interest on foreign assets need to not only report the income, but also need to file the FBARs or other forms. Failure to comply triggers the six-year period.
This suggests that there is a six-year outer limit within which the IRS must audit or lose out. However, if the IRS alleges fraud on the part of a taxpayer, there is no limit. The good news, Wood says, is that it is hard for the IRS to show fraud.
How can you protect yourself? Woods tips are to file tax returns, keep good records, be organized, and file on time. Think carefully when you are doing your return. Don’t make stupid mistakes by guessing at numbers. If you hear from the IRS, respond within the time limit for a response. Get professional advice.
Robert W. Wood is the Managing Partner of Wood LLP, San Francisco. Often listed among the best tax lawyers in America, Wood has broad experience in corporate, partnership and individual tax matters. Concerning the tax treatment of litigation settlements and judgments, he is perhaps the preeminent tax lawyer in the United States. He is also an authority on merger and acquisition tax matters, tax opinions, offshore account and entity disclosures, and many types of tax controversies. The Legal Broadcast Network is a featured network of Sequence Media Group.