Your most important defense against an IRS audit

Audits of IRS Tax Return Audit

A tax court judge determined that a joint tax return that both spouses do not sign is ineligible to be submitted. This decision regarding the signature line on a 1040 tax form appears straightforward. However, the real purpose of the decision was to extend the statute of limitations so that the IRS could audit this couple’s prior-year tax return. This example teaches us to close out previous tax returns from audit risk as well as the signature line of the tax form.

IRS rules

The three-year rule. For three years following the filing of the tax return or the initial filing deadline, whichever comes first, the IRS may audit the return.

The six-year rule. If you understate your income by 25% or more, the audit window expands to three years. One example is understating the taxable value of someone transferring property to you.

The forever rule. If a tax return is not submitted, fraud, or undeclared overseas assets are involved, then there is no time limit.

State rules vary. The statute of limitations differs in each state. Many states extend the federal window by six months to a year to give themselves time to respond to any federal tax changes brought on by an audit or an amended tax return.

Amended returns. When you make changes to your federal tax return, the IRS typically has 60 days to review them. If the modified tax return is filed close to the end of the audit window, this could extend the audit window.

Tax return audit defense

Keep the time as short as possible. Try to submit your tax return before the original filing deadline or earlier. For the majority of us, it is April 15. Use certified mail or save copies of e-file confirmations to keep track of your filings’ timing. But also be aware that there are exceptions to this rule. It is advisable to talk about your circumstances because late legal changes frequently necessitate the filing of an extension.

Start the clock. Remember that the audit clock begins once you file your tax return. For example, this was the issue with our couple’s tax return. Without both signatures, the jointly filed tax return was not deemed to have been filed. This delays the audit’s timeframe. The result was a large (and pricey) audit window open to the taxpayers.

Understand the permission to extend. The IRS may occasionally request your consent to prolong the audit term. To buy some time to complete an audit, they will do this. The audit window will shut if you reject, but the IRS may still issue you a tax charge based on inaccurate information. If you receive this request, you must ask for help before granting a delay.

Know your state’s rules. The statute of limitations varies between states. For instance, if you file an amended federal tax return but omit to file an amended state tax return, several states will keep their audit periods open forever.

Contact us. Although many dread the April filing deadline, remember that each deadline also ends the opportunity to audit a timely filed prior-year tax return. Contact our RRBB accountants and advisors if you have any questions.


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