Background
WHEN is your return free from IRS audit? From your point of view, statute of limitations prevents the IRS from collecting a deficiency in tax or beginning a civil or criminal case. Statute of limitations provides a date of finality after which the IRS or the taxpayer can take no further actions. We can breathe a little easier when we know that our returns are out of the line of fire.
Three-year Statute of Limitations
Normally, the IRS must assess tax, or file suit against the taxpayer to collect the tax, within three years after the return is filed. The three-year period of limitation on assessment also applies to penalties. The statute increased to four years if you omit 25% of your gross income. There is no statute for fraudulent returns. The statute never runs out and you can be audited anytime.
When the Statute Runs
The statute of limitations on assessment begins to run on the day after you file your return. Thus, the day of filing is excluded from the computation of the three-year period. For example, taxpayers who filed their 2015 Form 1040 on 4/15/16 are free and clear after 4/15/19 as the IRS can’t assess a deficiency after that date. A return filed early is considered filed on the due date of the return. A return filed after the original due date, is considered filed on the date the return is actually received by the IRS. Extending the due date of the return does not shorten the assessment period.
Example 1: Statute of limitations for individual income tax Form 1040:
If you filed your 2015 Form 1040 return on 3/5/16, the return was deemed filed on 4/15/16, and thus, the IRS can’t assess a tax deficiency after 4/15/19. If the return was extended to 10/15/16, and was filed on that date, the period of assessment would run from 10/15/16 to 10/15/19.
If you filed your 2013 Form 1040 return on 4/15/14, the federal statute runs out on 4/15/17. Add two years if you omitted 25% of your income. California has a 4-year stature so the state has until 4/15/18 to audit your 2013 tax return.
Example 2: Statute of limitations for quarterly federal payroll tax returns:
If your corporation timely filed its quarterly federal payroll tax return Form 941s for the four quarters of 2015 on 4/30/15, 7/31/15, 10/31/15, and 1/31/15, all four returns were deemed filed on 4/17/16, which means that the IRS has until 4/15/19, to assess a tax deficiency for any of the four quarters.
Example3: Statute of limitations for unemployment tax return (FUTA) Form 940:
Employer’s annual federal unemployment tax return (FUTA) Form 940 doesn’t fall under this rule even though it is an employment tax return. The statute of limitations for a 2015 return expires three years after the filing deadline on 1/31/16, not 4/15/16.
Caveat: The countdown never starts if a return is not filed.
TIPS:
1. The usual “out” for a taxpayer under stress is to close the audit fast.
2. You want to end your misery by closing the audit ASAP.
3. But consider going the opposite way: slow down the process.
4. Time can be in your favor. The IRS is not a model of efficiency.
5. Auditors get sick, go for medical checkups, and take care of their kids just like the rest of us.
6. They are promoted, transferred, or fired. In the meantime, the statute can run out.
7. They have only 36 months from the time you file to the time they close the audit.
8. IRS Manual instructs them to finish audit within 28 months.
9. They only have eight months to close your audit, a narrow window for complicated cases.
10. The strategy: speed up or slow down depending on the issues of your case.
* * *
Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation in Pasadena, California.
* * *
He has 50 years of experience in defending taxpayers audited by the IRS, FTB, EDD, BOE and other governmental agencies. He is publishing a book on his expertise – “HOW TO AVOID OR SURVIVE IRS AUDITS.” Our readers may inquire about the book or email tax questions at [email protected].
