How many years back can the IRS go when auditing your returns?

IRS attorneys will tell you it is presently unclear how many years back the IRS may go auditing your returns in certain cases. That’s because cases like Salman Ranch, LTD suggest the IRS may go back as far as six years to audit your tax returns and look for back taxes you may owe. IRS tax lawyers say in other cases, like Home Concrete & Supply LLC, the agency has been limited to going back only three years to audit tax returns.

The good news, according to IRS tax attorneys is that most of the time the IRS will only be permitted to go back three years to conduct an audit. But, these IRS attorneys point out that the agency gets twice the time (six years) for a “substantial understatement of income.” IRS attorneys say case law interprets a “substantial understatement” as an omission of 25% or more of gross income. But understanding what is meant by omitting 25% or more of your gross income is sometimes the subject of hotly contested litigation.

IRS tax lawyers explain the IRS takes the position that anything which has the “effect” of omitting 25% or more of your gross income, such as an inflated tax basis, entitles the agency to another three years to conduct its audit. So, if you sell your home for $3 million dollars and claim your investment in the property (your basis) was $1.5 million dollars, when in truth is it was only $500,000 the effect of your basis would be that you paid tax on $1.5 million dollars when you should have paid taxes on $2.5 million dollars. In this example, IRS attorneys say the agency would argue it’s entitled to audit you going back six years.

So when does the clock start? According to IRS tax lawyers the statue of limitations typically runs three years after the return’s due date (ordinarily April 15th). If you file your tax return before the actual due date (i.e. February 15th), the due date is still the controlling date for the statute of limitations. If you file your return later, without an extension, IRS attorneys say the statute will run three years from your actual late filing date rather than the due date.

Given the foregoing, IRS tax lawyers caution taxpayers to consider keeping their tax records longer than conventional wisdom has historically dictated (three years) on the outside chance the government may want to audit six years after the fact. This is particularly true as the law in this area is continuing to be written by Federal District Courts, and the IRS keeps pushing the boundaries of the statute of limitations in which to audit.

If you have questions about whether an IRS audit is timely, you are encouraged to seek help from a competent IRS attorney or other tax professional.

 

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

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