Many people interpret the statute of limitations on the assessment of tax as the statute of limitations for an audit. However, there is not actually a statute of limitations for an audit, although it may appear that way in practice. After all, if the government does not have the ability to assess tax, it generally has no incentive to go through the audit process. Concerned about being audited by the IRS? Contact a Roseville tax lawyer of NewPoint Law Group, LLP.
Usually, the statute of limitations for the IRS to assess additional tax is three years after the date that the tax return is filed. An important caveat is that tax returns filed prior to the due date are deemed to be filed on the due date. This means that if an individual tax return is filed on March 11th of a given year, it considered to be filed on April 15th of that year, so long as no extension was filed. It is typical that the IRS would then have three years from April 15th to perform an audit and assess additional tax.
Substantial Omission Exception
An exception to the three-year rule exists where there is a substantial omission of gross income, in which case a six-year statute of limitations applies. A substantial omission is defined as an amount in excess of 25 percent of the gross income stated in the return. In the case of a business, gross income refers to the amount of income reported prior to taking any business deductions into account. Additionally, the six-year rule does not apply where an overstatement of basis reduces taxable income.
False or Fraudulent Return Exception
False or fraudulent returns that are made with the intent to evade tax have an unlimited statute of limitations. This means that an assessment can be made at any time, conceivably forever. Likewise, if no return is filed at all, the statute of limitations does not begin, and tax can be assessed at any time.
Statute of Limitations for Tax Preparer Fraud
There is currently a debate as to whether the unlimited statute of limitations applies to preparer fraud, or if there must be fraud on the part of the taxpayer. The IRS’s current position is that preparer fraud is sufficient to allow for an unlimited statute of limitations. The Tax Court agreed with this interpretation in Allen v. Commissioner, 128 T.C. 37 (2007). The IRS has also contended that the Second Circuit supports this interpretation in its holding in City Wide Transit, Inc. v. Commissioner, 709 F.3d 102, 108 (2d Cir. 2013)); however, a closer reading would reveal that the Second Circuit did not actually make a decision on that issue.
Although the Ninth Circuit has not ruled on this issue, it was recently addressed in the Federal Circuit in BASR Partnership v. U.S., No. 14-5037 (Fed. Cir. 2015).
In that particular case, the majority wisely affirmed the decision of the United States Court of Federal Claims in holding that preparer fraud is not imputed to the taxpayer, and does not result in an unlimited statute of limitations.
As this issue has not been decided by the Supreme Court or in any other Circuits, it may be wise to avoid the Tax Court in this matter and raise the issue instead in the United States Court of Federal Claims.