How Long Does The IRS Have To Audit Your Tax Return?

In our tax practice, we hear this question all too often: How long does the IRS have to question and assess additional tax on my tax return? For most taxpayers who reported all their income, the IRS has three years from the date of filing the returns to examine them. This period is termed the statute of limitations. But wait – as in all things taxes, it is not that clean cut. Here are some complications:

You file before the April due date – If you file before the April due date, the three-year statute of limitations still begins on the April due date. So filing early does not start an earlier running of the statute of limitations. For example, whether you filed your 2010 return on February 15, 2011 or April 15, 2011, the statute did not start running until April 18, 2011 (because the due date was changed due to a federal holiday in Washington, DC).

You file after the April due date – The assessment period for a late-filed return starts on the day after the actual filing, whether the lateness is due to a taxpayer’s delinquency, or under a filing extension granted by IRS. For example, say your 2010 return is on extension until October 17, 2011 (October 15 falls on a weekend so the due date is the next business day), and you actually file on September 1, 2011. The statute of limitations for further assessments by the IRS will end on September 2, 2014. So the earlier you file those extension returns, the sooner you start the running of the statute of limitations.

If you want to be cautious you may wish to retain verification of when the return was filed. For electronically filed returns, you can retain the confirmation from the IRS accepting the electronically filed return. If you file a paper return, proof of mailing can be obtained from the post office at the time you mail the return.

You file an amended tax return – If after filing an original tax return you subsequently discover you made an error, an amended return is used to make the correction to the original. The filing of the amended tax return does not extend the statute of limitation unless the amended return is filed within 60 days before the limitations period expires. If that occurs, the IRS generally has 60 days from the receipt of the return to assess additional tax.

You understated your income by more than 25% – When a taxpayer underreports his or her gross income by more than 25%, the three year statute of limitations is increased to six years.

In determining if more than 25% has been omitted, capital gains and losses aren’t netted; only gains are taken into account. These “omissions” don’t include amounts for which adequate information is given on the return or attached statements. For this purpose, gross income, as it relates to a trade or business, means the total of the amounts received or accrued from the sale of goods or services, without reduction for the cost of those goods or services. In addition, any basis overstatement that leads to an understatement of gross income constitutes an omission.

You file three years late – Suppose you procrastinate and you file your return three years or more after the April due date for that return. If you owe money, you will have to pay what you owe plus interest and late filing and late payment penalties. If you have a refund due, you will forfeit that refund and perhaps get stuck with a $135 minimum late filing penalty. No refunds are issued three years after the filing due date.

10-year collection period – Once an assessment of tax has been made within the statutory period, the IRS may collect the tax by levy or court proceeding started within 10 years after the assessment or within any period for collection agreed upon by the taxpayer and the IRS before the expiration of the 10-year period.

Remember not to discard your tax records until after the statute has run its course. When disposing of old tax records, be careful not to discard records that prove the cost of items that have not been sold. For example, you may have placed home improvement records in with your annual receipts for the year the improvement was made. You don’t want to discard those records until the statute runs out for the year you sold the home. The same applies to purchase records for stocks, bonds, reinvested dividends, business assets, or anything you will sell in the future and need to prove the cost.

If you are behind on filing your returns and would like to get caught up, please contact E-File Florida. If you discovered you omitted something from your original return and would like to file an amended return, we can help with that as well.

Esther Hastings is President/CEO of E-File Florida, LLC located in Davie, FL. E-File Florida has been helping taxpayers and small business owners to maximize their tax refunds for over 19 years. E-File Florida firmly believes that the best way for anyone to legally and legitimately reduce their tax liabilities is to know the tax rules and how these rules pertain to their particular situation. “When you know the rules, then you are positioned to use them to your advantage!”

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Don’t Be The Victim of a Scam or ID Theft

The Internal Revenue Service is encouraging taxpayers to guard against being misled by unscrupulous individuals trying to persuade them to file false claims for tax credits or rebates.

The IRS has noted an increase in tax return-related scams, frequently involving unsuspecting taxpayers who normally do not have a filing requirement in the first place. These taxpayers are led to believe they should file a return with the IRS for tax credits, refunds or rebates to which they are not really entitled.

Most paid tax return preparers provide honest and professional service, but there are some who engage in fraud and other illegal activities. Unscrupulous preparers deceive people into paying for advice on how to file false claims. In other situations, identity theft is involved.

Taxpayers should be wary of any of the following:

• Fictitious claims for refunds or rebates based on excess or withheld Social Security benefits.
• Claims that Treasury Form 1080 can be used to transfer funds from the Social Security Administration to the IRS, enabling a payout from the IRS.
• Unfamiliar for-profit tax services teaming up with local churches.
• Homemade flyers and brochures implying credits or refunds are available without proof of eligibility.
• Offers of free money with no documentation required.
• Promises of refunds for “Low Income – No Documents Tax Returns.”
• Claims for the expired Economic Recovery Credit Program or Recovery Rebate Credit.
• Advice on claiming the Earned Income Tax Credit based on exaggerated reports of self-employment income.
• Promises of larger tax refunds
• Emails from the IRS asking for anything! The IRS does NOT contact anyone by email.

In some cases, nonexistent Social Security refunds or rebates have been the bait used by the con artists. In other situations, taxpayers deserve the tax credits they are promised but the preparer uses fictitious or inflated information on the return, which results in a fraudulent return.

Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file with little or no documentation, have been appearing in community churches around the country. Promoters are targeting church congregations, exploiting their good intentions and credibility. These schemes also often spread by word of mouth among unsuspecting and well-intentioned people telling their friends and relatives. Promoters of these scams often prey upon low-income individuals and the elderly.

They build false hopes and charge people good money for bad advice. In the end, the victims discover their claims are rejected or the refund barely exceeds what they paid the promoter. Meanwhile, their money and the promoters are long gone.

Unsuspecting individuals are most likely to get caught up in scams. The IRS is warning all taxpayers, and those who help others prepare returns, to remain vigilant. If it sounds too good to be true, it probably is.

If your social security number has been fraudulently used on a tax return other than your own, we recommend that you contact your local police department and file a report. We also strongly urge you to call the three major credit reporting agencies (Equifax, Experion and Trans Union) and issue a fraud alert on your file.  Doing this will prompt them to contact you when an attempt is made to fraudulently open a new credit account without your knowing.  Lastly, you should alert the IRS that your identity has been stolen by filing IRS form 14039.

Above all, remember that the IRS does not initiate taxpayer contact by e-mail. Whenever you receive an unsolicited or dubious solicitation that includes you providing your SSN, bank account number or other financial information, be skeptical. These scam artists can make communication look and sound like it is legitimate. When in doubt, call this office. Don’t let yourself be a victim of these scams.

Feel free to contact E-File Florida if you have any questions or concerns regarding scams or ID theft. We are here as a resource to you!