Tax Lawyer's Blog

Robert Wood of Forbes.Com blogs about the IRS’s statute of limitations on audits in Even the IRS Has Time Limits:

If you face a tax audit and can legitimately point to the statute of limitations to head off trouble and expense, you should. Why should you have to prove you were entitled to a deduction (or have to find and produce yellowed receipts) if it is simply too late for the IRS to make a claim?

Given the importance of the statute–both to heading off audit trouble and to knowing when you may be able to throw some of those receipts away–it is surprising how few taxpayers are statute savvy.

Here’s what Robert says taxpayers should know:

The overarching federal tax statute of limitations runs for three years after you file a tax return. If your tax return is due April 15, but you file early, the statute runs exactly three years after you file. If you file late and do not have an extension, the statute runs three years following your actual (late) filing date.

The statute is six years if your return includes a “substantial understatement of income.” Generally this means you’ve left off 25% or more of your gross income, but exactly what that means is currently the subject of litigation.

Predictably, the IRS is trying to widen the scope of the 6 year statute:

The IRS is now arguing in court that anything on your tax return that has the effect of a 25% understatement of gross income gives it an extra three years. Still, most court decisions conclude that overstating deductions is not the same as omitting income.

We recently blogged about the IRS’s new treasury regulation subjecting taxpayer overstatements of basis to the 6 year statute.

Related Posts:

• Tax Court Update – January 2009 – Statute of Limitations on Assessment
• The 10 Year Statute of Limitation on Collection of an IRS Debt

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