Probably one of the most dreaded events that can occur to you is an IRS audit. Those that have gone through one can attest to months of emotional drain, fear, and stress. Naturally, among the first questions a person asks when an audit letter comes in the mail is, “how long does the IRS have to audit me?” The answer can be a bit complicated and really boils down to, “it depends on a few factors.”

Statute of Limitations

The statute of limitation begins its run on the date you file your tax return and the IRS has three years from that date to conduct and close the audit. That means that the IRS must complete the following in that time frame in order to declare an additional tax liability on you:

• Select your return for auditing
• Conduct whatever procedural auditing steps it needs for its case
• Procure an agreement from you for additional tax liability or refund
• Secure an extension of limitations from you, or
• Issue a “Notice of Deficiency,” which is the IRS’s conclusion of what your correct tax liability is, and at which point you are granted 90 days to contest the findings in the United States Tax Court

It is important to note that during this process if you do not accept the extension of limitations that the IRS offers you, the auditor will be forced to come to a determination based on the facts in his possession at that time. Therefore, although it may seem to be in your best interest to deny the extension, it actually will allow you more time to furnish documents to support your case.

As nearly all rules, there are some exceptions to the Statute of Limitations.

The Exceptions

The first exception comes into play when the taxpayer (or joint husband and wife filers) fails to report 25% of his correct gross income. In this case, the IRS has concluded and can prove the omission and consequently, the Statute of Limitations now goes up to six years instead of three.

Some other exceptions that essentially wipe out completely the Statute of Limitations include the following:

• Failure to file a return
• Failure to report certain foreign assets
• Presence of fraud

These above instances call for extra vigilance in the way you handle your annual filings. Eliminating indefinitely the Statue of Limitations keeps you vulnerable forever to receiving that dreaded IRS audit letter.   Moreover, these actions can, in many cases, bring criminal prosecution against you, which mean a chance of jail time. Therefore, as a rule of thumb, report as required in order to keep yourself in the IRS’s good standing and to sleep well at night.

Final Considerations

Even if you know that you properly filed your past returns and three to six years have gone by, it is still wise to hold on to documents that support your positions in those annual returns. Materials that show transactions, asset basis, existence of a loss, and capital gains are especially important to keep for the long haul.   We have come to notice that the burden of proving many of these instances falls on you, the taxpayer.   In short, the difference of winning or losing an audit comes down to mere records, and as a result, you do not want to handle the potential dilemma without them.

Dallo Law Group is here to help if you have received notice of an audit examination. Our experienced team of attorneys, who are both CPAs and tax lawyers, know the ins and outs of audits as well as the rules and exceptions to the Statute of Limitations.

An audit is usually a long process, but you should know that you have rights and we can assist you to assert them with the IRS. Give us a call at 619-795 8000.

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