Tax audits: How long do you need to worry?

The Internal Revenue Service (IRS) can review taxpayers’ returns. But, like most things in the legal world, this ability is generally limited.

How is the IRS’ limited? In most cases, a statute of limitations, or time limit, applies. This means the agency has a set amount of time it can look back into your tax returns.

How long does the IRS have? In most cases, the IRS can look back three years after the tax return was filed.

Are there exceptions? Yes. The IRS can generally get an extension if the agency can establish that the taxpayer failed to report 25% or more of their taxable income. If successful, the government will generally grant the IRS a three year extension, giving the agency the ability to look back through six years of returns.

In some circumstances, the agency can get an unlimited extension. These situations generally include allegations the taxpayer filed false tax returns, failed to file a tax return or knowingly attempted to illegally avoid tax obligations and are generally limited to civil, not criminal, investigations.

How does the IRS establish the taxpayer “knowingly” attempted to avoid their taxes? The agency has used various types of evidence to support the allegation that a taxpayer “knowingly” or “willfully” illegally evaded their tax obligations. Some examples include a copy of a reminder from an accountant, warning letters sent to the taxpayer from the IRS, use of frivolous arguments to support the alleged fraud and evidence showing the accused earns a large income. The agency has also used the accused’s background and education to support that they likely knew of the illegal activity.

It is important to note that avoidance of taxes is not a crime. Taxpayers have the right to act to reduce or minimize their tax obligations through legal channels. However, these actions cannot be deceitful or used to conceal income.

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