IRS’ Six-Year Statute of Limitations Before Supreme Court

In and of itself being audited is a trying process. Dealing with Internal Revenue Service (IRS) agents can be difficult, and looking for receipts and other records dating back three years only adds to the pressure of an audit. Now the IRS is looking for ways to broaden the definition of what will qualify for doubling the statute of limitations on audits and a lawsuit challenging the IRS' ability to do this is currently in front of the United States Supreme Court.

Generally, the statute of limitations for being audited is three years from the filing deadline (April 15). This means, that the IRS is able to audit a person's returns up to three years after the return is filed. After this time period has run most receipts or documents can be shredded knowing that the IRS will not be asking about them.

In some instances, however, the IRS uses a six-year statute of limitations. For instance, if the IRS suspects that a person submitted a tax return with a "substantial understatement of income" - meaning gross income was understated by at least 25 percent - the IRS will use a six-year statute of limitations.

The questions as to what "substantial understatement of income" by 25 percent means is what has put the IRS in front of the Supreme Court. An article in Forbes notes that the IRS has interpreted this to mean that anything put on a tax return, including overstating deductions or the basis used for selling property, and not just the understating of gross income. The federal circuit courts have been split on how to answer these questions.

Whether or not the IRS will be able to broaden the definition used for events that trigger the six-year statute of limitations will be answered by the Supreme Court this session. Regardless of the answer the Supreme Court gives, being audited by the IRS is still a difficult process. Speak with an attorney knowledgeable and experienced in handling tax matters as soon as you are contacted by the IRS.

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