Business Law

Business Law News ISSUE 3, 2022


Written by Robert W. Wood

It would be extremely satisfying to say, "Sorry, IRS, you are too late to audit me!" It would save you stress and expense, and would avoid having to prove that you were entitled to a deduction or find receipts. The IRS statute of limitations is important for heading off audit trouble, whether you are an individual, corporation, partnership, or nonprofit organization. Here is what you need to know.

Myth #1. The IRS Has Three Years, and then You are Home Free. Not really. It is true that the main federal tax statute of limitations runs three years after you file your tax return. But there are many exceptions that give the IRS six years or longer. Timing, therefore, can be critical. If your tax return is due on April 15, but you file early, the normal statute runs three years after the due date. As a result, filing early does not start the three years statute to run. If you get an extension and file on October 15, your three years runs from that later date. 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 have left off more than 25% of your gross income. Suppose, however, that you earned $200,000, but only reported $140,000 of income. In this situation, you omitted more than 25%, so that means you can be audited for six years.

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