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Statute of Limitations for IRS Income Tax Audits (3-Years to Forever)

Statute of Limitations for IRS Income Tax Audits (3-Years to Forever) - Golding & Golding, Board Certified Specialist

Statute of Limitations for IRS Income Tax Audits (3-Years to Forever) – Golding & Golding, Board Certified Specialist

Statute of Limitations for IRS Income Tax Audits (3-Years to Forever)

The IRS statutes for audit/examination can be very daunting and downright overwhelming.

The Statute of Limitations for IRS Income Tax Audits generally last from 3-years, 6-years, or forever.

Common questions we receive about IRS Audits are:

  • What is an IRS audit?
  • Why was I audited?
  • Can I go to jail?
  • What are the penalties?
  • Will the IRS Levy my bank account?
  • Will the IRS Lien my house?
  • Will the IRS Seize my assets?
  • Will the IRS take my passport?

Statute of Limitations for IRS Income Tax Audits

The IRS Audit Statutes are very complex, even for experienced tax practitioners. That is because the IRS does not make it very clear to the average taxpayer regarding when the statue begins, exceptions, exclusions, limitations — and the difference between the IRS auditing you and the IRS collecting money you owe.

IRS Audit Non-Technical Summary

We will provide a brief summary of how the statute of limitations works regarding audits. We will not be citing any code sections or inserting any technical jargon – just providing you with a brief understanding of the IRS audit statute.

What is an IRS Audit?

The IRS has the right to audit or examine your tax return. The IRS has multiple departments depending on whether you are self-employed, a large business versus a small business, or if you have international related issues, etc. But, all you need to know is that the IRS has the right to audit your return.

Who Gets Picked for an Audit?

Nobody really knows for sure. But, there are some factors that may increase the chance of being audited. They typically include, being:

  • A High-Net Worth Person
  • Self-employed
  • Foreign Income or Assets
  • Travel and Entertainment Expenses
  • Home-Office Deduction
  • Schedule A Deductions which seem Inflated
  • A W-2 Taxpayer who has a Losing Side “Business”

These are not the only factors to determine whether a person will be audited, but they are some of the more commonly known red flags.

IRS Audit Statute Does Not Run Until You File

This is very important: just because three years has past since the time the return was due, does not mean the statute of limitations has started to run yet; it hasn’t. The IRS Statute of Limitations to audit you does not begin until you file a tax return.

3 Year IRS Audit Statute of Limitations

Most of the time, the IRS only has three years to audit you from the tax return due date.

Therefore, if you filed a tax return before April of the current tax year, the statute of limitations still does not begin until April 15 (or 17th or 18th depending on the year). For example, if David’s 2015 tax return is due on April 15, 2016, but David files the return on February 1, 2016 – the IRS still has until April 2019 to audit David — even though David filed before April 15.

If you filed a tax return after the due date, the IRS has three years from the day you filed late.

6 Year IRS Audit Statute of Limitations

Under certain circumstances such as having a significant amount of unreported income (or improper deductions which deflated the income significantly) or foreign income of more than $5000 that stems from a section 6038 asset – the statute is extended to six years.

In other words, the IRS gets to tack on an additional three years to audit you. Therefore, using the example above, the IRS would have an additional three years audit if it is determined that David had significant amount of unreported income or over embellished deductions.

Practice Point

Typically, the IRS does not start by going back six years. Rather, the IRS will audit you for three years and then depending on the facts and circumstances of your situation expand the audit another three years.

Therefore, if you happen to be out of compliance for prior years then — even if you decide not to go back and file returns in prior years — you should consider being in compliance for at least the three most current years with either the IRS Offshore Voluntary Disclosure Program or IRS Domestic Voluntary Disclosure Program.

Why? Because even if you are audited for three years and can pretty much show that you’ve done your best to be in compliance  for the last 3-years, the IRS agent may have no aforethought to believe he or she could go back another three years, because there would be no facts or circumstances in your current three-year audit that would lead the agent to believe they had reason to go back another three years (see Offshore Disclosure Options below).

Forever Statute

If you never file a tax return, the statute of limitations does not begin to run and therefore technically the IRS has forever to audit that return – or at least until you file it.

Alternatively, if the IRS has enough facts sufficient to show you acted fraudulently, the IRS has the right to go back as far as it wants to audit you. In other words, if there are sufficient facts to show the IRS believes that you acted with the intent to evade or defraud the IRS, the mere fact that you filed timely returns – or even untimely returns – more than three or six years ago does not prevent the IRS from auditing those years.

Practice Point

It should be noted, that the IRS cannot just make unsubstantiated blind accusations in order to open up prior-year returns. Rather, the IRS still has the burden to show a potential fraud or that you acted with such reckless disregard that it would warrant opening up prior returns. (Note: the IRS tries to put the burden back on taxpayers on issues involving FBARs, but most courts will still require the IRS to meet its burden).

Avoiding the Audit with IRS Voluntary Disclosure

If a person has undisclosed domestic or offshore money, they may be able to get into compliance and avoid an unnecessary audit an significantly higher fines and penalties, by entering one of the IRS voluntary disclosure programs.

What Can You Do?

Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.

We Specialize in Safely Disclosing Foreign Money

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)

Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Examples of areas of tax we handle

Who Decides to Disclose Unreported Money?

What Types of Clients Do we Represent?

We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.

You are not alone, and you are not the only one to find himself or herself in this situation.

Sean M. Golding, JD, LL.M., EA – Board Certified Tax Law Specialist

Our Managing Partner, Sean M. Golding, JD, LLM, EA  holds an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)

He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.

*Click Here to Learn about how Attorneys falsely market their services as “specialists.”

Less than 1% of Tax Attorneys Nationwide

Out of more than 200,000 practicing attorneys in California, less than 400 attorneys have achieved this Certified Tax Law Specialist designation.

The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. It is a designation earned by less than 1% of attorneys.

IRS Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

A Penalty for failing to file Form 8938

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 3520

The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

A Penalty for failing to file Form 3520-A

The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

A Penalty for failing to file Form 5471

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 5472

The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.

A Penalty for failing to file Form 926

The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion

Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

What Should You Do?

Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.

Be Careful of the IRS

With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.

4 Types of IRS Voluntary Disclosure Programs

There are typically four types of IRS Voluntary Disclosure programs, and they include:

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