Sometimes, the Internal Revenue Service IRS chooses some people and businesses for an audit. They usually do so through random sampling or screening candidates digitally. You may also be selected if you have done business with someone that was selected for an audit before.
Small business owners need to understand the extent the IRS can audit so they will know if to hold their receipts, financial records, and other tax related data in case they will be selected for the audit. This article will walk you through the number of years in a row can the IRS audit you and when does unlimited statute of limitations apply.
How Many Years in a Row Can the IRS Audit You?
Individuals can be audited by the IRS many times, sometimes in consecutive years. Mostly, the agent on the case is unaware that you were audited the previous year, although your return will contain red flags that trigger an audit. You can’t audit a return from a given year twice; therefore, once you reach a resolution, that file for the year can’t be opened again unless you asked for it or there is fraud evidence.
The 3-Year and 6-Year Audit Rules
There are certain rules that determine the number of years the IRS can go back during an audit. The three-year rule works with most audits. This means the statute of limitations applies for three years after filing the return or due date.
If you filed a late return, the three-year audit starts the moment the paperwork is filed, but if the paperwork is filed earlier, the three years begin on the day taxes are due. This provides the IRS with enough time to process all accounts and make sure that no tax issues are there to contend with. Taxpayers are also required to follow the three-year rule and file amended returns at the same time.
The six-year rule usually becomes effective in a few important cases:
If 25% of the income is reported or less in the return, the Internal Revenue Service can prolong the duration by analyzing the additional tax changes from three to six years. In the next six years, 25% may be applied if the 25% failed to be paid or more in taxes in what is called a “basis overstatement” situation where the items on tax returns can cause a reduction in tax payment.
For individuals that have removed more than $5,000 in foreign income on their tax return. Hiding money in tax havens can lead to criminal investigations and severe financial and legal penalties. Click here to learn more about tax havens.
Unlimited Statute of Limitations: When Does It Apply?
There are certain situations that can make IRS audit returns indefinitely; these cases include:
- An unfiled return
In situations where you fail to do your taxes, the Internal Revenue Service will evaluate the year at any moment under the Substitute for Return Program. Filing this means the three-year assessment limit doesn’t start unless the tax return is layer filed.
- Agreeing to extend the time limit
When a statutory waiver form is signed, the duration limit will be amended to the agreed timeline. However, this isn’t always unlimited, and the proposed time extension can be negotiated.
- Tax evasion
Tax evasion is the act of intentionally filing a false or fraudulent return with the intention of avoiding taxes. If anybody is found to have filed a fraudulent return, the Internal Revenue Service will go back regardless of how far it is to obtain all the important information.
Read https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/combat-tax-crimes.html to learn more about tax evasion penalties.
- Omitting forms
Omitting some forms like the Afton 5471 for those who own a part of a foreign organization, Form 8938 for foreign assets, or Form 5471 for those who receive gifts or inheritance from foreign nationals can lead to an indefinite audit situation. Other situations that can lead to the suspension of the three-year time limit on the IRS collection Statute include:
If the IRS issues a ninety-day letter or a Notice of Deficiency. In the United States, a person can have ninety days, and 150 those living outside the United States, to agree with the Internal Revenue Service’s proposed assessment or file a petition with the Tax Court where an attorney like the Raleigh tax attorney will handle the case. The suspension usually starts a day after the IRS sends the letter.
Bankruptcy can be filed where the assessment period will be suspended by the duration allowed by law in the case.
Conclusion
In conclusion, the Internal Revenue Service can include returns filed within the last 3 years in an audit. If they identify a substantial error, they may add additional years. They usually don’t go back more than 6 years. The IRS tries to admit tax returns as soon as possible once they are filed.