In most cases, the statute of limitations grants the IRS a period of up to three years in which to initiate an audit of a taxpayer. The three-year clock begins counting down from the latter of the following dates:
- The date on which the return was originally due.In most cases, this is April 15.
- The date on which the return was originally filed.If the taxpayer obtained a filing extension, which may be done by filing Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return), the filing date may have been up to six months later than the original April due date without the return being considered delinquent. Form 4868 grants taxpayers until October 15 to file without incurring failure-to-file penalties.
Though the three-year statute of limitations applies in many cases, there are also a few exceptions which may affect certain taxpayers. In other words, there are some tax situations where the statute of limitations is extended, granting the IRS additional time to audit taxpayers who meet certain criteria. For taxpayers who meet these criteria, the risk of an audit is heightened.
Some major exceptions to the three-year IRS audit statute of limitations are listed below. If any of these exceptions seem applicable to your situation, you should contact an experienced IRS tax audit attorney immediately for further guidance. If you are chosen to be audited, it is essential to begin developing a strategy as soon as possible.
- Up to Six Years– The IRS may have up to six years in which to conduct an audit in cases where a tax return indicates a “substantial understatement of income,” which in most cases, means an understatement of approximately 25% or more. Taxpayers must report and pay taxes on taxable income, making the willful failure to report income an offense punishable by fines, restitution, and prison time.
- No Time Limit– In some situations, no statute of limitations applies, giving the IRS unlimited time in which to conduct an audit. This is a worst-case scenario for any taxpayer, making aggressive legal representation imperative. The IRS may audit taxpayers with no time limit in the following scenarios:
- The taxpayer does not file a tax return.If a taxpayer is not ready to file by Tax Day, the appropriate response is to obtain a time extension and consult with an experienced tax attorney. A tax professional can help you get caught up on back taxes and delinquent returns while working to manage your failure-to-file penalties.
- The taxpayer files a fraudulent tax return. Filing a fraudulent tax return is a felony violation of 26 U.S. Code § 7206(1). Taxpayers who commit this offense may be fined up to $100,000 and/or imprisoned for up to three years.
- Voluntary Extensions – Depending on the circumstances, the IRS may ask the taxpayer to voluntarily grant a time extension on a case-by-case basis using Form 872 (Consent to Extend the Time to Assess Tax). Keep in mind that, with some exceptions, extensions are generally permanent if granted. It is crucial to consult with a tax lawyer before consenting to a voluntary extension of time to assess tax.